While a statistically tested strategy and an efficient money management technique are essential, the right mindset is what glues everything together.
The reason is rather simple: Trading is a very tough profession as it requires us to take quick and often counter-intuitive decisions.
And most of the time the quality of these decisions is affected by myriads of factors based on our current mental state – are we sad, happy, anxious, depressed; are we hungry, tired…
These decisions will also involve all of our beliefs about money, certainty, failure, right and wrong, and so on. When you are forced into making quick decisions, if you are incognizant and unaware of your inner states, the strongest thoughts, feelings, or emotions are going to prevail.
So to succeed as a trader, we need a certain presence of mind and an awareness of our inner states.
There is nothing esoteric or even illusory about trading success.
If you do not sort out your psychological shortcomings, durable market success will always seem elusive because an impulsive behavior based on some dysfunctional beliefs, unresolved emotional pain, random thoughts or feelings will always be right around the corner waiting to sap days, weeks or months of hard-earned profits.
The fundamental idea behind trading is that it is a game where we are rewarded for our ability to mindfully abide by a certain set of tested rules. Said this way, it surely sounds easy – it’s not!
But “not easy” does not mean “impossible.” There is nothing esoteric or even illusory about trading success. In most cases, it just requires an openness to challenge your current set of behaviors and select the most appropriate set of steps that provide better psychological satisfaction.
In other words, there is a way to trade that offers better psychological well-being in the long run. And my point is that you have been trading with an apprehension to short-term pain while seeking short-term emotional gratification. To trade successfully, you have to turn this around: Embrace the short-term pain and seek long-term emotional gratification!
Doing what is difficult over what is easy is a skill that we can all learn.
Everything we do in life is for the purpose of altering the way we feel. We form relationships so that we can feel certain emotions – maybe love, and avoid others like loneliness.
We eat specific foods to enjoy their ephemeral presence on our tongues. We read for the pleasure of thinking another person’s thoughts. The brain is a pleasure-seeking machine – we usually do what makes us feel good.
In trading, this natural tendency of always chasing pleasure, as opposed to pain, is often counter-productive just because of the way financial markets are designed to make profits available for us.
What makes us feel good and steer away from short-term emotional pain is usually the wrong decision to take.
- Taking profits early by fear of losing all,
- Removing a stop-loss because of some memories we have of past trades that could have worked well if we gave them a little more space,
- Risking more than we should on any single trade,
Buying at the top and selling at the bottom…
… these things surely feel psychologically good at first, until their negative repercussions unfold. Acknowledging that this is the structure of the game we are playing allows us to play it differently.
We can come to a point in our trading where the mental discomforts we experience as a result of doing what we should do instead of what we want to do becomes synonymous to positive returns over a set number of trades.
Doing what is difficult over what is easy is a skill that we can all learn, and how we pay attention to the present moment largely determines our ability to cultivate and apply that skill. By that same token, it allows us to trade our set of rules efficiently, thus returning consistent results out of our trading operations.
When we are able to practice patience instead of giving into our instant pleasure seeking nature; when we are able to cultivate equanimity instead of impulse-driven behaviors, we allow ourselves to experience better psychological satisfaction. But that is not all. We also largely change the character of our experiences and, therefore, the quality of our lives.
What can be expected, if such a behavior is practiced and refined, is the learning of enjoying the struggle. In other words, when we keep doing things that are in our best interests – as hard as it is to do those things – slowly our minds start to create new neural pathways, thus new associations, consequently linking the mental struggle to the ensuing pleasure of having consistent trading results.
If you have been to the gym before, you must know first-hand that certain kinds of pain can be exquisitely pleasurable. The burn of lifting weights, for instance, would be agonizing if it was a symptom of terminal illness. But because it is associated with health and fitness, most people find it enjoyable.
Simply stating that one could trade without emotions is like saying that one could go about without having thoughts. It’s impossible!
Similarly, we can come to a point in our trading where the mental discomforts we experience as a result of doing what we should do instead of what we want to do becomes synonymous to positive returns over a set number of trades.
I think we can never completely rid ourselves of the emotions that come along with trading. At the time of this writing, I have been trading for 8 years now, and I still can’t figure out what it means to “control emotions” as we often hear traders preach on the internet – if by this logic, “emotional control” suggests eliminating or suppressing emotions.
- I still experience that gut-churning feeling when price gaps below my stop loss.
- I still experience that acute feeling of frustration when I am out of a trade with small gains while being witness to the explosion of price right after I’m out.
- I still have “what ifs” scenarios popping into my consciousness every now and then.
Of course, to a much lesser degree now, but these thoughts, sensations, and feelings never completely disappear regardless of one’s commitment or level of expertise. And there is a very logical reason for that: Emotions are simply embedded in our human nature. Simply stating that one could trade without emotions is like saying that one could go about without having thoughts. It’s impossible!
The good news is that the possibility exists to completely drop thoughts, feelings or emotions. This is not to say that they do not occur in consciousness – they still do and they always will. But with experience and the right practice, you can learn not to feel identical to everything that goes on in your mind and body.
We cannot change the markets, we can only change ourselves!
In other words, you don’t associate yourself with them anymore; you become a passive observer of your own thoughts, feelings, and sensations, in such a way that they do not impinge on your behavior anymore. By means of observation, you become detached from them!
The most important questions that struggling traders need to ask themselves are these: “How do I create consistency?” “How do I change my experience of trading to something that is truly fulfilling?” Notice how those questions involve the self. This shows us that we are the key to the trading conundrum!
If our experience of trading isn’t satisfactory to us as a result of how we perceive and do things, then we have to change our approach to trading in favor of a way that is more satisfying to us.
This shift has to come from within us because as much as we would want the markets to change and conform to what is inside of us, it’s never going to happen. We cannot change the markets, we can only change ourselves!
This openness to ask the right questions and change ourselves is sine qua non.
This was an excerpt from chapter two of my book Zero To Hero. If you liked it, you can read the rest by clicking on the link below.