Trading Under the Right Mental Conditions

I think anything is possible if you have the mindset and the will and desire to do it and put the time in.

Roger Clemens

Traders are similar to athletes who perform at their best, or musicians who are virtuosos. What these people have in common is that they can focus their attention on the task at hand; inadequacies, conflicts, or current life's stress does not distract them. The more you can remove stress and anxiety in your life, the more you can trade effortlessly in a focused manner. A winning approach to trading is often just a matter of approaching trading by following some basic guidelines. 


We must learn to think in probabilities, and not focus on the outcome of a single trade. When you are trading, try and think of the bigger picture. You may lose on a single trade, but if you are trading with sound principles and strategies, you will come out ahead across a series of trades (remember from the money management section we are looking to win only 1 out of 3 with a proper risk/reward ratio). It is this long-term perspective we must focus on, not our short-term outcomes. We must learn to strategically execute trade after trade in a calm and logical manner to make the law of averages work in our favor.


It's vital to control our risk. Successful traders risk only a small percentage of their trading capital on a single trade. Limiting the risk on a single trade further relieves the pressure to feel that every trade needs to be a winner. Having a detailed trading plan is equally important. When we know what we are going to do and when we are going to do it, we feel in control. Leaving parts of our trading plan unspecified will yield a sense of uneasiness. This sense of uneasiness will make our discipline falter. If however, we have a clear idea of when to enter a trade and when to exit, then, and only then can we focus easily on monitoring the trade and taking decisive action. 


There's also a psychological aspect to trading like a winner. Sometimes it's important to remember some common and I might add very normal human tendencies. There is a psychological need in most of us to avoid loss and this need comes from the need to be right (our ego). Don't be afraid to admit you are wrong. And don't think that you must capitalize on every opportunity to make a profit. If your expectations are too high, it is a psychological setup for failure. By trading under the right mental conditions, you can trade profitability and consistently in the long term.

Climbing Out of a Rut

When you first start out trading, becoming a winning trader can seem impossible. Somehow you have to build up enough talent to trade markets that aren’t cooperative most of the time. When you are thrown off balance as a trader, it can be hard not to get in a rut. You might think, “Why bother trying again? I’ll just lose even more money. I want to give up.” If you aren’t careful, you can develop a “psychological complex.” Rather than look at the markets objectively, you can start placing too much emotional significance on setbacks and trading outcomes. Suddenly, routine setbacks are a big deal; each trade has more personal meaning than it should. When you make a trade, it’s as if your self-esteem and identity are on the line with your money. If you don’t do something fast, you may feel so anxious and overly emotional that you can no longer think logically. And then losses begin to mount.

In their book, “The Innergame of Trading,” Robert Koppel and Howard Abell outline a strategy for getting out of a slump and regaining your mental edge. A slump may reflect conflicts and issues that you have not yet resolved. It’s vital to identify these issues and find some resolution. Let’s review five major issues discussed by Koppel and Abell. First, make

sure that you fully understand your motives for trading. Rather than trading for the money, it is important that you truly love the game. If you merely trade for the money, you will often feel disappointed by the endless setbacks you must overcome, but if you trade because you love the independence trading offers, and are stimulated by the intellectual side of trading, you will take setbacks in stride. Second, it’s also necessary to make sure that you trade with a trading style that suits your personality. Many traders make the mistake of trying to trade an approach that doesn’t suit their style. For example, they may have an overly anxious temperament yet take big risks on short-term trades that are inherently uneasy. This style of trading stresses them out to the point that they can’t enjoy trading. Instead, they vacillate between frustration and stagnation. In the end, you can only trade with the skills and resources you have available, and this may mean finding a trading style that suits you, rather than a style that is the most popular at the time. Third, trading should make you feel good. You should think it is fun. When you wake up in the morning, you should feel as if you can’t wait to trade. If it doesn’t make you feel good, you should wonder why you should even bother. And if you don’t wonder explicitly, it will gnaw at you and overpower you when you least expect it. Fourth, make sure that you acknowledge how difficult it is to learn to become a profitable trader. Don’t mistakenly think that trading is easy. It is not. It takes hard work to become a winning trader. People become upset when they forget how much time and effort is required to! learn t o trade. When you underestimate the difficulty of trading, you will feel frustrated when your performance does not meet your expectations. But when you remember that trading is extremely difficult, you will feel less disappointed when your hard work and effort do not always pay off. Fifth, build up a sense of confidence. You may not trade up to par at first, but it is vital that you believe that your hard work and effort will eventually pay off.


When the markets don’t cooperate with you, don’t despair. Work through personal issues that prevent you from living up to your potential. If you stay focused and cultivate a positive state of mind, you’ll recover from setbacks quickly and hone the trading skills you need to trade like a winner.

Reprint from Innerworth Newsletter March 2006