Successful Trading Can Be Counterintuitive:
There are so many misconceptions about what it takes to be a successful trader that it’s difficult to even keep track of them all. But one of the biggest fallacies is that any highly successful businessperson or industry professional would automatically make a great trader. That assumption couldn’t be further from the truth. The reality is that the market has a unique set of characteristics that commands an understanding of certain principles and the acquisition of specific beliefs and perspectives. In other words, it requires a complete paradigm or mindset shift in order to effectively operate within it.
Nobody is born with the full set of mental skills required to be a successful trader. And there are no naturals – not even lawyers, doctors, or presidents of companies. Sure, some people may have a predisposition for being calm in chaotic environments or confident in the face of uncertainty. But we all have biases, insecurities, bad habits, and defense mechanisms that can hijack our brains at the worst possible times. Especially in a trading environment when money is on the line. So trading isn’t simply about being smart in the classic sense of the term, as most people would agree that lawyers and doctors are generally smart. Rather, it’s about being emotionally intelligent, which is often overlooked. By first becoming aware of our inherent biases and defense mechanisms, we can begin to take steps toward rewiring our brains to better facilitate our goal of becoming consistently profitable traders.
The Top 5 Trading Paradoxes:
1) Losing Traders Keep on Losing Because They Don’t Want to Lose
This is a cycle that many traders find themselves in and have an extremely difficult time escaping. They want so badly not to lose that they just can’t seem to avoid it. Their ego becomes so attached to being right that it sabotages their results. But good trading is not about being right, it’s about trading right. In other words, it’s about following our validated systems with the highest degree of discipline, knowing that our execution of those systems is what drives results.
Going against our rules or trading randomly is only doing ourselves a disservice. The reality is that there will be some losses with any trading system and we just have to accept that fact. It’s actually possible to be profitable by having more losing trades than winning trades, assuming your average wins are larger than your average losses. It’s like the concept of the mirror: people don’t have trading problems, they have personal problems that reflect in their trading. It all goes back to our perspective and mindset. Our results are a reflection of how we think, feel and act. So if we don’t like our trading results, then we need to adjust our attitudes and behaviors.
2) Clearing Our Heads Can Be the Best Way to Make Progress
Most novice traders try to bombard themselves with information by signing up for multiple newsletters, researching various strategies, and subscribing to screening services in order to scan for setups, among many other things, all in the hopes that it will help them become consistently profitable. There is certainly a degree to which these tools can help achieve that goal, but they’re far from the most critical aspects of trading successfully. Most of the time, in fact, this tactic causes them to overwhelm themselves with information, which results in nothing but confusion and inaction. It may seem like putting more and more information into our brains would help us, but it only distracts us from achieving the ultimate goal of becoming successful traders.
As it turns out, the best way to make progress in a situation like this is to take a step back from all the noise and try to clear our heads. This can be done through stress-relieving activities like physical exercise, but mainly meditation is what can help us become steady, composed traders. There are plenty of misconceptions about meditation from individuals who say that it’s religious, for hippies, or just completely pointless. But the reality is that it’s brain exercise, anybody can do it, and science has proven its benefits. Those benefits include decreasing anxiety, stress, and depression, while improving focus, attention, resilience and patience. Based on the science, it’s clear that all traders should have a consistent meditation practice built into their routine.
3) Our Minds Are Our Biggest Weakness But Also Our Biggest Strength
As beginners, there’s no doubt that our minds are what hold us back from being good traders. More often than not, this happens without us even realizing it. We tend to think that it’s something external that’s causing our terrible results. We blame the “guru” that sent us his prediction, the newsletter that gave us a “hot stock tip”, or even the market itself for not fulfilling our desires. But the market doesn’t care about our own personal wants and needs, and there’s no sense in blaming other people or forces for our misfortune. We have to take accountability and understand that the consistency we seek is internal. It’s within our own minds, and fortunately, within our power to control.
The most common pitfall of traders is ignoring the mindset aspect. Those traders who are unwilling to change or simply in denial never quite realize or accept that the fundamental component of trading is mastering the mind. The market has qualities and characteristics that are unique and humans aren’t naturally good at dealing with those characteristics. As a result, we have to make adjustments to our beliefs and attitudes in order to operate effectively within that environment. Nobody is born with the proper trading principles etched into their brains. Somewhere along the way, successful traders make the realization that who we become is a byproduct of our own thoughts, choices, and actions. The good news is that everybody is capable of changing and growing, so what was originally our biggest weakness can ultimately become our biggest strength.
4) We Must Be Both Rigid and Flexible
In order to be successful traders, we have to be rigid with our rules and flexible with our expectations. Our rules provide a framework for consistency, so by ignoring them we’re only hurting ourselves. If we make inconsistent and erratic trading a habit, then our results will be inconsistent and erratic. As long as our trading system has a positive expectancy, then following our rules with a high degree of discipline is what will bring us closer to our ultimate goal of consistent profitability. So it seems rather obvious that we shouldn’t sacrifice our ultimate goal of long-term success for short-term emotional gratification.
Our expectations are also something we need to constantly contend with so that we don’t allow them to bring us unnecessary suffering. Any time our desires or expectations go unfulfilled, it brings us feelings of disappoint. The problem with having unrealistic expectations is that the market is uncertain, and having expectations over something we don’t have control over is a recipe for suffering. And that suffering will only make it harder to act in a calm and consistent manner. When we understand that the result of each individual trade is out of our hands no matter how much work or analysis we put into it, we realize that having any expectations other than what our system’s calculated expectancy is over a large series of trades simply doesn’t align with the realities of the market. It’s about focusing on the process (principles/systems/rules) instead of the results (profits/losses).
5) Anything Can Happen But We Don’t Need to Know What Will Happen
Anything can happen on any individual trade, but we don’t need to know what will happen in order to make money. In other words, one single trade is chaotic, random, and unpredictable. But the sum of market action over time, which is essentially just human behavior, can create predictable trading patterns. This pattern recognition provides opportunities for traders to find themselves statistical advantages. As a result, large groups of trades based on particular patterns, trends, and signals can prove to have an edge.
While it’s great news that edges exist for us traders to be able to make money, it’s important not to forget that anything can happen on an individual trade. This is critical to understand so that we have measures in place to limit downside risk on every single trade. There’s nothing worse than having a huge loss on one trade that will take ten more winning trades just to make up for it. Keep in mind that there’s essentially five potential results of any trade 1) big win, 2) small win, 3) breakeven, 4) small loss, and 5) big loss. If we can eliminate number five (big losses) then our chances of trading success skyrocket. In fact, big losses are typically the primary factor of a negative expectancy system, which is something we’re trying to avoid like the plague.
Proper Mindset is the Foundation For Trading Success:
The bottom line is that trading can be an afflictive experience, both financially and emotionally, without the proper focus on mindset. But the good news is that it’s within our power to cultivate the proper mindset. We’re all capable of dismantling the compulsive and destructive patterns of thought we’ve been conditioned to have up until this point in time. It just takes consistent mental practices to achieve it. This is where the work is. So if trading success is something we truly want to achieve, we not only have to understand the main principles, top paradoxes, and the proper mindset required, we have to take the actions necessary to make this knowledge a functional aspect of our lives.
People tend to resist change, yet change is the only constant in both life and the market. So it serves us much better to embrace change as an opportunity. Because doing so allows us to evolve and grow. We’ve been prisoners to our subconscious minds for too long. The undirected mind is merely focused on survival – the detection of threats that we can either fight or run away from (fight to flight). These natural instincts, however, keep us in a state of suffering – one filled with anxiety and fear. Within the confines of the market, this simply doesn’t work. It only leads to negative feelings, irrational behaviors, and financial losses. So it’s time to re-program. We have to make the conscious decision and commit to the ongoing effort of feeding it new information. Eventually, our destructive attitudes and behaviors can be replaced with constructive attitudes and behaviors that actually align with the characteristics of the market.
Learn how mindfulness can lead to drastic improvements in trading with Trading Composure’s Trading Psychology Mastery Course.
Written by Matt Thomas (@MattThomasTP)
- Top 4 Trading Principles That Every Trader Must Understand
- #1 Reason 90% of Traders Fail and How You Can Avoid Being One of Them
- Trading Composure Review – Learn the Importance of Mindfulness in Trading
- Top 25 Quotes From Trading in the Zone By Mark Douglas
- What is the Concept of “The Mirror” and How Does it Apply to Trading
I’m mostly a long-term value investor and don’t commonly trade. I actually don’t trade at all right now. But I have a lot of spare cash that I can work with, and it would be nice to make some short-term gains with that cash. Your entire website is seriously useful for understanding what it takes to be a consistently successful trader. I consider myself a beginner trader despite my experience with the long-term value investing.
I agree 10,000% that mindfulness is key on taking on trading (or any) challenges we may encounter. Personally, I meditate all the time, even for just a couple minutes and it helps me kind of hit the reset button and focus. Taking a step back and seeing the bigger picture when it comes to the market is truly the best approach. We are our biggest enemies so we need to know how are minds work and align them with the market before we can be successful.