Building The Mental Framework To Reach Long Term Success
Why Mindset Is The First Edge?
As traders, most of us are so alike. Our first goal is to find that one perfect strategy to make us rich, the holy grail of trading. Truth is, no matter what system or strategy you are trading, you can only do as good as what your mindset allows it. That’s right, your brain is always on the driver seat!
The difference you can make from having a bad to a good mindset is tremendous. In this article we will oversee the pillars of what makes your mindset a winner one.
Core Psychological Concept, What Is The Trader Mindset?
The trader mindset is a mental framework, or a way of thinking if you like that allows him to:
- Make decisions even when there is uncertainty.
- Have a full control of his impulsive reactions.
- Think clearly in probabilities and not predictions.
- Accepts losses as a part of the process.
You might confuse it with motivation, however, motivation is just a temporary state of mind as a mindset is rooted in your behavior. It is something that can be learned, repeated and trained.
Trading Is A Probabilistic Game, Not A Predictive One.
Most new traders, including me in my debuts, fall in the trap of predicting the market. That prediction is factually impossible, successful traders are managing their probabilities and risk to achieve an edge on the market.
The mindset shift to observe here would be “I don’t need to be right, I only need to follow my system”.
The Identity Shift
That happens when you become someone who executes the process professionally and no longer someone who hope to win. That one might look easy but this is really a game changer.
Emotional Separation
The movements on the markets vs the orders you have taken do not define your value as a person.
A Win streak does not make you a genius, although, if you read this I suspect you might be one.
Your losses do not make you a failure.
That distinction is important to make as it separates your emotional volatility from what has happened on the trading platform.
Discipline, discipline and discipline
A professional trader execute his system even when they don’t “feel like it” or even if they are “down”. The mindset is the ability to override the emotions with a structure that gives a feeling of security.
Why Mindset Problems Damage Trading Results?
As you probably know by now if you follow that series, psychology is a game changer. From FOMO to Revenge Trades to moving stoplosses out of fear instead of following your system. There is plenty of opportunities for your mind to take over your system and ruin your edge.
Let’s say you hit a 3:1 Payoff ratio and feel invincible now. That closed trade gives you overconfidence and can make you take trades you should not. You might even skip a trailing stop move and ending up losing that trade completely. When you’re on a high, I recommend taking a break from trading until you feel composed and make sure you are in a state of mind to follow your exact rules before resuming your trading. Make sure you feel calm, have a clear mind and are committed to that trade before taking it.
On the other hand, if you are on a slump, I know, it’s painful for everyone, you might feel discouraged. When the next setup appears on your chart, you might hesitate, second guess or even skip it altogether. That trade might have been the streak breaker in your slump and recovered your money. When you’re on a low, you might want to avoid losses. You should simply double check your trading plan’s entry checklist. Once that step is double checked, take a deep breath, exhale slowly and proceed as scripted in there. Your system has an edge, failing to follow it’s rules might remove that edge completely.
Some might think that bot traders have it easy for that matter. I can tell you that this is not the case. In fact, you WILL look at the bot running and you WILL panic when there is a drawdown. This is especially true if this is a bot you did not program and that you don’t understand. You might think things like what if the bot has that special function that is gonna blow my account every so often because it’s a flawed logic. Maybe you will expect the bot you purchased to give you a certain outcome let’s say they promise you a 80% win rate, you might panic after 1/4 losing trade.
Maybe the bot works, maybe it doesn’t. For this I have a very strict protocol for myself and that makes my psychology wonders, I do the programming and the testing myself. I backtest with the sample that pleases me and forward test it myself before launching live.
Journaling
If you follow this series, you must know by now that I will talk about journaling. It takes but a few minutes and keeps you on track to master your own psychology.
Ask yourself at the end of the trading day, Did I trade professionally or did I feel anxiety or fear? Did my emotions lead me out of my trading plan? Is there a behavior I need to reinforce tomorrow?
Also make sure to note if you skipped a rule, managed or not managed your emotions and most importantly did you follow your trading plan? These information must be reviewed minimally every week to make sure you are drifting your edge away long term.
Algorithm Trading Context
Here is how it really applies to the algorithmic way of trading.
You must trust your system. You built it, you calculated the probabilities and found that the edge was good enough to trade live with it. When in doubt, get into your backtest archives and see how the slumps looked like, the drawdowns were acceptable on paper. Your system is not perfect but in the end, it gives you an edge on over X years and Y number of trades.
Handle your drawdown. Drawdowns suck alright. If any trader could just skip them they would. We all entered in trading to make money after all. You must however understand that the drawdowns are inevitable, your system is not broken, it’s just a drawdown and on the big picture, your system is going to make profits because you calculated it’s edge.
Forward testing. I feels like it’s a no brainer but an acceptable forward test period is key before going live. That period can vary from one individual to another but I found that, for me, 3 months is minimal for systems that trade on multiple assets and at least 9 months for systems that trade on a single asset. The reason for that gap is that it’s easier to overfit your indicators to a single asset and it gives you a much higher risk when going live.
Mindset Is the First Edge You Build and the Last Edge You Lose
Working on your strategy improves your performance.
Working on your psychology makes sure you are executing it to it’s best performance.
In the end, your own success will often depend on your discipline, your ability to detach from the short term outcome, your reaction to uncertainty and your trust on your own system.
Every trading session gives you an opportunity to improve on your trading ability. Remember that you don’t need any psychology until you are trading it live so this can be tricky.
Trade with clarity.
Trade with confidence.
Trade with intention.
If you are new to trading and look for a place to start educating yourself. I have made a free course for you to follow. Simply click here.
