Mastering The Trader Mindset

The first lesson that every prospective trader should learn is not so much in the charts, fundamentals or any of the other X’s and O’s. Sure knowledge of these concepts is necessary but there are many ex-traders that were masters of fundamentals and/or technical analysis that are either broke, out of the trading game or both. The main reason for this is because the trader was not psychologically and mentally prepared.

So what does it mean to be mentally prepared to trade in the stock market (or any other market for that matter)? Mentally prepared means keeping your emotions in check and sticking by the rules set by the trading system that you have chosen and researched to use for yourself. Simply put, do not fall in love with a stock. Just because the fundamentals look good doesn’t mean you should just dump your money into it and forget it. Yes, we all hear and read about Warren Buffet and long term value investing. Just keep in mind that he purchases large stakes in those companies and can, to some extent, control how that company is run. Also keep in mind that I’m talking about trading here and not investing.

Some of the best traders that I know have failed at least one time, learned lessons, built up more capital to try again and either failed again or succeeded. Those that failed again just repeated the process until they finally ‘got it’ and became a wealthy and successful trader. From my own experiences and well as theirs the biggest obstacle that was overcome was to not become emotionally involved in the companies that were traded. Once these companies hit certain thresholds, either on the upside or down, triggers were activated and money was either pulled out or put back in…no additional thought was needed. Basically, just stick to the system. If your system calls for you to sell everything after an 8% loss then sell it, don’t think about what-if or how great the company fundamentals are on paper. If it your system calls for you to sell half after a 20% gain then sell, don’t talk yourself into holding on to it. Now after you sell it you can revisit the trade and evaluate it to see if it’s worth trying again but make sure that is a whole different thought process and not linked to the initial trade.

Here are three good books that talk about the mental approach to trading that I have found helpful and insightful (I don’t have any monetary interest in any of these books nor do I receive any compensation for recommending them, they are just meant to be a resource):

1. High Probability Trading by Marcel Link
2. Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude by Mark Douglas
3. Trading For a Living: Psychology, Trading Tactics, Money Management by Alexander Elder