Trading is a game of skill – you can’t play without understanding the rules. While getting the technicals right is the first step to becoming a successful trader, only 1% traders achieve profitability in the long run. If technical knowledge was all it took for success, this number would be significantly higher. So what’s going on?
Not many traders realize that in addition to technical skills, they need to build the right set of psychological skills to spearhead their journey to becoming a master trader.
Plan & evaluate your trades
Successful trading is the result of having a well-thought out strategy that is executed consistently. A good trading plan will define what you do in the market and how – helping you build trading routines, avoid errors, and manage yourself better.
Pro tip: Write down your trading plan. Create handy checklists based on your trading goals, market parameters, entry-exit criteria and risk management strategy. Define the performance and process metrics you want to track and use a diary to record these regularly. By evaluating your trades, you will be able to build insights to improve your game.
Stick to your plan with discipline
A plan will only help if you are able to stick to it with discipline. Don’t be tempted to change your plan/checklist to suit a particular trade you are in – changes are best made using your performance data and when you are not in the trade.
Pro tip: Use a rules-based approach to deal with situations where being disciplined is a challenge. For example, some of us move our stop-losses down when a trade doesn’t go well – in the hope that it will come back, thus losing more money. A rule for this situation could be – “I will not move my stop-losses except in certain extreme conditions.” Define these conditions in advance as well.
Boost your ability to focus
Looking at the trading screen for long periods of time can make it hard to focus and often leads to poor decisions or costly mistakes.
Pro tip: Build your attention capacity by using the Pomodoro technique – developed by Francesco Cirillo in the 1980s. Divide your attention between 25-minute focus periods (where you concentrate on the task at hand) and 5 minute mental breaks. By practising this technique regularly, you can gradually increase your focus period to up to an hour!
Use emotions to your advantage
Most traders believe that they would trade better if only they could become emotionless. However, emotions are like messengers that help you make sense of situations. At the same time, to function well in the market, it is important to keep a check on negative emotions like fear, greed, anxiety and even stress. The key then is to learn to regulate your emotions, so you can take better trading decisions.
Pro tip: When emotions ride high, take a time out. Get away from the screen and get some fresh air. You can also try out a simple deep breathing exercise for five minutes to feel better.
Manage loss like a pro
Trading is a risky game – even the most experienced trader will face losses and setbacks. The best traders use losses as an opportunity to learn from mistakes and grow, rather than avoiding them. Thus, the first step in managing losses is to accept that they will happen, and to have a plan in place for dealing with them when they do.
Pro tip: In times of heavy losses or setbacks, leading trading psychologist Steve Ward recommends focussing on three pillars: your strengths (what are they and how can you use them in this situation?), the positives (what is going well right now in your life?), and controllables (what are the things that you can do to make things better?).
The most important thing when it comes to mastering your mind is to put these tips into action. By starting small and practising these skills regularly, you will be empowered to improve your trading performance and your P&L as well.