Recognize the Connection Between Day Trading Psychology and Your Results:
I’m sure you know the old adages: “buy low and sell high” and “cut your losses quickly and let your winners run”. These sound simple enough, right? But the reality is that the majority of traders do the exact opposite – they buy high and sell low, and cut their wins quickly and let their losers run. The most basic explanation for this is that they’re operating from a fear-based perspective, which is the reason why over 90% of traders fail. In winning trades, the fear of losing causes them to focus solely on information that they perceive will diminish the unrealized gains currently sitting in their account, so they cut their profitable trades short. In losing trades, they focus solely on information that they perceive as validation that the trade should be a winner, and as a result, they let their losers run.
Obviously, this fear-based approach to trading is not the path to consistent profitability. It’s the path to inconsistency and a completely drained account. If you’re operating in the market out of fear, then you engage natural defense mechanisms that reduce your field of perception and limit your choices. Just think about it: imagine that you’re walking around outside and all of a sudden a tiger appears ten feet in front of you. The only options in that moment are to run from the tiger, fight the tiger, or freeze up. Everything else around you in that moment no longer matters and is not being perceived – only the threat of the tiger. Similarly, traders behave the same way within the market, treating specific pieces of information that the market generates like mortal threats. It’s no wonder most traders experience inconsistent and overall negative results. So in order to achieve consistency, you need to build confidence and trust.
If You Want Control, Be Accountable For Your Mindset, Methods & Results:
There’s no doubt that most market participants trade randomly so that they don’t have to confront their own irrational behaviors. If they chose to implement more structure in their approach, it would force them to confront their own impulses, biases, and insecurities. So instead, they shift blame to external forces when their expectations and desires aren’t fulfilled. It’s not their own fault, it’s the “guru” who sent them the “hot stock pick” or the “expert” who sent them the “special report”. Even the market itself receives tremendous blame when all it does is provide information. In fact, the market is completely neutral and objective, but it’s the collective group of market participants who make it “volatile” and “irrational”. If we want trading success, we can’t relinquish our power to external forces.
Knowing that we can’t individually control the market (that power is reserved for only a small number of individuals and institutions), we have to realize that what we do actually have control over is our reactions to it (this is where all of our power is). It’s like the saying goes: “you can’t control the wind, but you can certainly adjust your sails”. If we can’t control the market (the wind) and also fail to control our reactions to it (the sails), then there’s no question that our results will be mysterious and random. But when we adjust our perceptions and reactions to the market, then we can finally be in harmony with it instead of fighting it. There’s nothing “bad” or “threatening” about any particular market movement – those are only perceptions. A one cent move in a stock could be one trader’s perfect opportunity to enter and another trader’s perfect opportunity to exit, but objectively it’s nothing more than a one cent move. The bottom line is that we have to take full responsibility for controllable factors – our mindset, methods, and subsequent results.
Who You Are Right Now is Not Capable of Achieving Consistent Profitability in the Market:
The harsh truth is that you are almost certainly incapable of achieving consistent profitability in the market with your current mindset. I know this because over 90% of traders fail, so if you’re a trader and currently reading this, then there’s nearly a 100% chance that your current mindset is ineffective within the market environment. The good news, however, is that the proper mindset can definitely be developed. In fact, every successful trader has had to transform their mental resources in order to survive and thrive in the market. These aren’t traits you’re born with – they’re attitudes, beliefs, and perspectives that you have to acquire. You have to understand that this environment displays unique characteristics which requires you to change and grow in order to become effective within it.
What you experience on the outside (in the market) is shaped by what is on the inside (your thoughts, emotions, beliefs, etc.). In other words, the market basically just reflects back to you what’s going on inside your own mind. So what you perceive is merely an illusion – an individual view of reality. But it’s not everybody’s reality – it’s just your perception. A market move you label as “bad” and “threatening” can be another trader’s label of “good” and “attractive”. The lesson here is that you have to take a more objective view on the market. Right now, you can take an active role in your self-transformation by becoming aware of any emotional discomfort you feel while trading. This pain is a sign that your current mindset is out of alignment with the realities of the market. The higher the discomfort level, the more critical it is for you to change in order to trade without fear, anxiety, worry, doubt, and regret.
The Fantasy Gap – Traders Want Consistent Profits, But Don’t Want to Change, Grow, and Develop:
It’s undeniable that there are millions of traders out there who like the idea of achieving consistent profitability in the market. The cars, mansions, and everything else money can buy becomes a bright and bold fantasy in their head. But when it comes to performing the actions that it actually takes to become a successful trader, they’re not willing to put the effort in. This is what I call the “fantasy gap”. Most traders enter the market with false beliefs and high expectations. They think trading is simple since it requires no physical work and it’s possible to make large amounts of money in a matter of seconds. But then it ends up being one of the most difficult endeavors of their lives because they’re ill-prepared mentally. The self-awareness and self-control required to be consistently profitable is just too intangible for people to grasp. Attaining the proper mindset is too perplexing. Profits are always so close, yet so elusive.
But if struggling traders choose not to change, then they subject themselves to the same recurring negative experiences within the market over-and-over again. They’ll just continue to strategy-hop in fear of missing out, remove stop loss orders in fear of losing, double-down on losing positions in fear of being wrong, exit winning trades too late in fear of leaving money on the table, and the list goes on-and-on. All of their trading decisions are completely driven by their impulsive and irrational thoughts, emotions, and behaviors, and then they expect great results, but it just doesn’t work that way. If you can’t define market behavior with a validated system and control your own behavior with the proper mindset, then you can’t make meaningful progress toward repeating winning trades and avoiding losing ones. Overall, there’s no question that trading is mostly a mental discipline that many traders aren’t willing to accept.
You must accept the psychological aspect of trading if you ever want to achieve consistent profitability within the market environment.
Written by Matt Thomas (@MattThomasTP)
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