Thursday, December 11, 2014

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.

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