I have seen so many traders try, come & go over the years I lost count. Simply because trading is not as easy as many portray it is. Trading requires discipline & risk management, & because most of us traders are simply degenerate gamblers the end result usually is not a positive one. Many fail due to the psychological battle within themselves. I am going to break down the common mistakes trader’s psychological make & offer suggestions to overcome them. How do I know my suggestions work? I have at one point in my trading career suffered from every common psychological breakdown & have made adjustments that work best for me.
- The “Account Balance” mental block. So many times I hear, read about people and their account balance. The market does not care what your account balance it. Many people complain about the pattern day trader rule & keeping an account balance of $25k so they can trade more. Others complain every time they hit 10k account balance they get knocked back down. All of this is psychological. If you are too worried about what your account balance is, you either need that money to live or you’re afraid you will “miss a trade” due to PDT rule. There are work arounds to the PDT rule such as trading with a prop firm; however I believe the PDT rule is there to protect traders. I have never met a successful trader who was worried about their account balance over the long term. These traders usually fade away. Simply because they do NOT take the correct risk when it’s the right time because they are worried about losing money.
When I left the cubicle at a leading Nasdaq company 10 years ago to trade full time instead of part time, I made sure I saved, scratched and clawed my paycheck to a comfortable savings cash balance. This was separate money then my trading money. These led me to trade with less stress, and take the calculated risk without worrying what my account balances were. Many don’t understand the mental pressure released when you have the correct cash reserves, or even when you are just trading the right size.
- The revenge trade mental block. Let’s admit it, that damn penny always gets you. As in, when you get the top or bottom tick stop out on a position…..to the penny. That penny has cost people millions…….in mental capital. This is one of the many reasons why I encourage people to use mental stops when entering a position without putting an order in. You have to be disciplined enough to sell when that mental stop is broken. What happens afterwards after the bottom tick stop out, many get angry and revenge trade which ALWAYS leads to disaster. That second, follow up trade is what crushes accounts over the long term – after you were so disciplined on your first trade with the penny stop out. Things can flip in a traders mind after that happens. My suggestion would be to take a walk or go to the gym after a stop out like this. An immediate, second trade ALWAYS leads to a loss.
- The “I need to make money every day mental block”. Ummm….no you don’t! Here is my top complaint I get from traders every damn week:
Welsh, I trade great for 10 straight days. Then, on day 11, I give it all back in one day and I am back to square one.
Oh so common, & when you think about it no money is made. This process is repeated and repeated until the trader is so mentally destroyed his day 11 losses are bigger than 2 weeks of gains. Then they burn out.
Besides better risk management, I suggest if you are a full time trader to take a monthly view with a journal. Many have tried this mental switch on my advice and are seeing instant results.
- Other traders are making more money than me complex. Let’s face it. With the invention of social media, trading has never ‘looked’ easier. All you ever see is gain, after gain, after gain posted. So mentally – you feel bad. You can’t compete. Obviously you suck and everyone is better at this than you. That could not be farther from the truth.
Many traders who only post positive P&L or never focus on their failures are insecure. They need to feel better than you to trade. When the fact is, the losers they are not posting? It’s beating them down. They need outside praise to get them to trade better. Think about that and how it changes your perspective on how you trade.
Bottom line – the stock market does not care how much money a person makes. Concentrate on yourself and don’t compare yourself to others which will make you a better trader.
- I am sucking & can’t hit a brick wall with a baseball if I was standing next to it attitude. There are times in my career when I have BAD. I mean, really bad. We are talking maybe 20 trades in a row losing streaks, especially in the beginning. It HAPPENS. It’s depressing. However, I never, ever let a streak like this beat me mentally. What I did when trading is going bad, I trade LESS SIZE. I cannot stress this enough. Each trade is independent of each other, HOWEVER, mentally, when you are in a trading losing streak it affects you, deeply. In order to get out of it, I trade less size, take on less risk until I am back on tract. This keeps your losses small during the losing streak. Many just cannot understand this point & can’t stay in the game because of it.
On the flip side, when I am hot, the profits are stacking; I up my size and press. Confidence is a funny thing. When you have the right amount of confidence, you make the most. Too much, you get destroyed. Too little, you cut your winners too soon & don’t have the discipline to honor your stops and lose too much.
Successful trading is not about who has the most money. It’s about batting the psychological thoughts within & overcoming them. Welsh