The Importance Of Trading Psychology – Investment Mindset
Table of Contents
What Is Mindset?
To most people “mindset” is how you see everyday life. Are you a happy or grumpy person? Are you positive or negative? That sort of stuff. But that’s just a very basic and poor view of what mindset actually is. Mindset isn’t the correct word in fact which is why I prefer using the term psychology as that is actually what it is, your personal psychology makes up who you are from the good to the ugly. It is the single biggest difference between long term successful traders and unprofitable ones.
I’m not talking about the BS quotes you see on Facebook or Instagram that talk about “follow your dreams” or “you can do it.” Because these are always posted by people who actually haven’t done either of these. Instead you want to train your mind to think of things rationally. WE ARE NOT RATIONAL CREATURES. Dan Ariely wrote a book titled Predictably Irrational, although this is a book designed for marketers, the points relate to trading as well. Essentially if we were 100% rational, we would be extremely wealthy. We wouldn’t follow “gurus” who we didn’t know and wouldn’t get tricked by people who claim to have “the next great system.” The majority of people reading this probably haven’t read this book but I highly recommend it.
Below is a video by Ryan Holiday, he is an extremely successful writer and he talks about the stoic principle in a Ted talk he did in Chicago a couple of years back. It’s a great watch but if you don’t have 20 minutes I’ll outline it quickly. Essentially the philosophy talks about the action being the most important element. The quotes below explain this perfectly.
The impediment to action advances action – What do you think this means when it comes to trading? Essentially it means the following – What stands in the way of making us become a successful trader, becomes the way we make successful trader! Makes sense right…. At the very start of your trading career you didn’t know enough about forex trading to make successful trades. So you went to find out more about it. That’s the action you took. And then maybe you found you needed information on a specific strategy, so that become the next piece of action. And so on and on until you either quit or became a successful trader, those are the only 2 end options.
The stoic principle also talks about how our actions may be impeded (as you probably know this is very common) but the mind adapts and converts it’s own purpose. This means that although you might lose 3, 4, 10 trades in a row. The mind is always learning and although you might have lost money, if you stay disciplined you will gain in the long run. Trust the process. Trust the process.
The final stoic principle talks about how you react to things that are seemingly out of your control. Let’s say you work in the city and have to drive to work – And your car doesn’t start. What happens? And why? —- In this exact moment is the difference between a successful person and a failure. You might be thinking that’s utterly stupid but I have yet to see this theory proven wrong, it’s called greatness in the moment. The same reason why athletes that win 10 gold medals don’t really become GREAT when they do this, they became great when they trained for 3 extra hours in the pouring rain or woke up at 4am before work everyday to get to the pool. That’s greatness in the moment, the world only saw their greatness when they won X number of gold medals.
So what happens to 99% of people when this happens? They get mad. Because they are going to be late. Because the car didn’t start. It’s not their fault. Repairs will probably cost lots of money. I’ll have to have a courtesy car. It will be bad. You can go ahead and admit if you would react that way. Now why is this such an issue? The main problem is that one (let’s be honest) TINY inconvenience in the grand scheme of things has now put you in a negative mindframe for what will likely be a few days. This affects 1.) Your work. 2.) Your Relationships and 3.) Everything In-between.
So let’s take a look at how the stoic principle deals with this. Car doesn’t start. Dam I MUST HAVE…. Forgotten to check the engine, forgot to get fuel/gas/oil, go for the MOT etc. It’s not passing blame. I WILL… (They make decisions there and then without becoming negative or anxious to what was in fact their decision.) catch an uber, call a taxi, get the train, get the bus, ask the wife to give me a lift. Anyone of hundreds of options. When you get to work 30 minutes late, I’m sorry I’m late car didn’t start but I’ll stay 30 mins later to make up for it.
Can you see the difference here. If anything this is a positive situation. When you react to negative stimuli POSITIVELY you have the ultimate power, 99% of people don’t do this. Probably a higher percentage than that, so when you learn and train yourself to react like this it gives you incredible authority in these situations. So let’s relate this to trading.
Forex Trading Psychology
OK so enough philosophy (sorry I bored you guys with that but its very important.) Time to get to your personal trading psychology and why its so important. As you probably know by now it’s not so much the outcome of a trade (result) it’s how you deal with that outcome, and what you did before the outcome itself. If you take each individual trade on it’s merits that’s a great start but there is more to it than that.
If you lose a trade how do you react? Do you become 1 of the 99% that react negatively or do you still to your theory and know that in the long term you will make a profit? If you do then you are well on the way to becoming a successful trader.
Back Testing A Strategy
The surest sign that a strategy or system will produce a profit in the future is to test it to see what it has done in the past. Now what does this have to do with trading psychology? EVERYTHING! If you know and have backtested a theory yourself, then you know when you lose a few trades in a row that this was always going to happen, that its just a matter of time before you get back on track and if you know that and have tested it, you will continue to get into good trading situations and become a profitable trader in the long run.
Professional Traders Have Bad Weeks
It’s not linear. Professional traders have bad weeks, they may even have bad months! That’s losing on a monthly basis. Some people might think that if you do that your somehow going to lose money forever, but its simply not the case. Trust the process. Trust your strategy. People have bad weeks. If your not a professional trader and you have a bad week? Guess what you are not alone! Bounce back, continue opening good trading positions and keep trading with the correct investment mindset and trading psychology.
Oh wow how I could write 5,000 words on this topic. But the basics are the important parts – Never go above 2-3% on a trade, probably never above 2% of your bankroll or trading account. And make the calculation every trade. Let’s say you start with $20,000 and have a great few months and get to $25,000. If you are using 1% of your BR per trade, don’t stay with $200, raise it to $250. And if you have a few losing weeks and go down to $22,000. Then make sure you lower your units to $210. It’s that simple, but always be consistent with your bankroll and never try to increase the percentage to get back past loses. That’s when issues start happening.
It Takes Time
This isn’t a quick profit game. The key is making good trades over months and months. If your a beginner trader you need to realise the 10,000 hour rule. I’ve done an article on this exact principle. It talks about how if you can make 5% a month on your money on a continuous basis you could be on $10 million in 10 years. It just takes time and you have to follow your strategies and theories and most importantly how you react to the “bad beats” to the “so close, shall I just….” to the “Ah that’s rubbish I’m not doing this anymore” thoughts you have. Consistent profits doesn’t mean consistently making profitable trades everyday, it means following your back-tested, proven systems with correct bankroll management.
That’s everything. If you have any questions on trading psychology let me know, if you haven’t done so already remember to check out our guide for beginner traders.