How to Become a Disciplined Trader
I will explain how you can develop a winning attitude in trading. But first of all, why psychology and trading even important. Well, trading is a very unique activity. It's unlike every other activity that you can imagine. In some cases even contradict some beliefs that we have acquired throughout our lives. Let me give an example of this. Most people think that the more work you put into something the better results you will get. For instance most jobs are paid on a per hour basis but this isn't necessarily the case for trading. Just because you spend countless hours analyzing the fundamentals, the technicals or anything else of an asset doesn't mean that you will make money. You may very well even lose money and a trade that you spend countless hours preparing. Trading is a very emotionally demanding activity. Seeing your hard-earned money vanish in front of your eyes isn't easy. But also huge gains do affect your emotions. Trading confronts us with constant uncertainty. May very well lose money on a day but you may also very well make money. It's not uncommon to see people lose weeks or even months of gains on one bad trade. Nevertheless, it is important to try to avoid emotional trading. Letting emotions influence your trading decisions can dramatically decrease your trading performance. It can be very hard to control your emotions when hard-earned money is on the line. There are five fundamental truths that can help traders to develop a winning mindset. First of all, anything can happen. In essence, the markets aren't anything else than millions of different people expressing their thoughts about different assets. People that think in assets prices low will likely buy, those that think in assets prices high will sell and others will wait for a better opportunity. But every single trader of these millions of people can impact the price. Therefore theoretically anything is possible. But even though everything is possible not everything is likely. The probability that an assets price will rise by hundreds of percent is relatively slim. However the probability is not zero. It is possible. This brings us to the second fundamental truth. You don't need to know what is going to happen next in order to make money. You don't only don't need to know what is going to happen next. You can't know what is going to happen next. We just learned that the markets aren't anything else then millions of people expressing their beliefs. If you know what's going to happen next, you would have to be familiar with the beliefs of all of these millions of people interacting with the markets. It's safe to say that this is impossible but that doesn't matter you can still make money in the markets. If you have the trading system with the true edge it really does not matter what's going to happen next? Well, the outcome of next trade is irrelevant. For example a casino has a true edge. The odds are on their side. Let's take roulette as an example. The casino has a higher probability of making than losing money on a game of roulette. However they do not know what's going to happen on the next roulette spin, nor do they care. They may very well lose money on the next spin of roulette. But that doesn't matter to them because they know that they will win in the long run. The same goes for your trading. As long as you have a trading system with the real edge all you have to do is stick to that trading system. The outcome of your next one two or even more trades does not matter. As long as you stick to your plan, the numbers will work themselves out in the long run. The next fundamental truth is that there's a random distribution between wins and losses for any given set of variables that define an edge. This goes hand-in-hand with the previous truth. Just because the odds are in your favour does not mean that you will be right. Let's look at our casino example once again.
The odds of winning a game of roulette are strongly in the favor of the casino. However that does not mean that they will win guaranteed. They will still lose money on some games. If you really believe in a random distribution between wins and losses, could you really ever feel betrayed by the market? If you flip the coin and guess right, you wouldn't necessarily expect to be right on the next flip simply because you were right on the last. Nor would you expect to be wrong on the next flip if you were wrong on the last flip. Let's move on to the next fundamental truth. An edge is nothing more than an indication of a higher probability of one thing happening over another. Hopefully this is relatively simple by now. Once again I'd used the casino example to explain this. In a game of roulette, the casino has a higher probability of making than losing money. So that is their edge. The final fundamental truth is that every moment in the market is unique. If this wouldn't be the case, it would mean that every single person and entity that interacted with the market during a previous moment would have to do the exact same thing again. They would all have to enter and exit their positions just like last time. This is more or less impossible and therefore every moment in the market is unique. If a moment isn't unique you would have to know every variable which once again isn't possible. So what are the takeaways of these five fundamental truths? Well, first of all you do need a concrete trading system with concrete rules. Otherwise, you wouldn't have an edge and then trading would be pointless. Remember, random trading will lead to random results. Besides a trading system, you also need a trading plan. You should always create a trading plan before every trade. It's very important that you create your trading plan before you open a trade because that's the only moment where you still are able to think 100% rationally. After you enter a trade your hard earned money is at risk and then your emotions will influence your decision making. Some key components of your trading plan should be your max risk, your max reward, your risk to reward ratio, your exit point, your entry point, your adjustment point, your position size and ideally even more. If you truly believe in the five fundamental truths, you will automatically create a trading plan before every trade. For instance if you actually believed that you don't know what's going to happen next and anything is possible, you would always define your risk and cut your loss. If you believed in your edge and all the truth why would you do it from your trading plan. Why would you revenge trade or double up to make back the losses from a previous trade. Why would you ever feel emotional pain if you believed in your edge. Does a casino feel emotional pain just because it lost on a single game of roulette? No, and neither should you. The more specific your trading plan is the better. If you have trouble sticking to your trading plan write it down. In theory, your trading plan should be so concrete that you would be able to give it to someone else who then could execute the entire plan without having to ask you.
The more specific a trading plan is, the less you will have to think about what you're going to do and thus you will trade more mechanically. Another tip for trading more mechanically is using trade alerts. If you know that they're going to exit or adjust a position if a price reaches a certain point, you can set an alert at that point. As soon as that price will be reached, you will get notified and can adjust your position without having to think about it. Alternatively, you could use automated orders like stop losses or take profit orders. But probably one of the most important takeaways is that you should trade small. You should never risk more than a few percent of your total capital on one trade. If you truly accept the risk before entering a trade and keep your position sizing small, you will never ever have trouble sleeping at night. Remember that you don't and can't know it's going to happen next and therefore it's not unlikely that your next trade will be a loser. If you risk all of your capsule at once and the next trade will be a loser, you will lose all of your capital at once. That's a disaster that you should never risk. This is also why casinos said betting limits. They know that they can very well lose on a single game of roulette. If someone wants to bet millions of dollars on a single game of roulette, the casino will likely decline. Because it knows that the odds aren't heavily in its favour. Their edge only really works in the long run when the number of occurrences is high enough. You should think the same way with your trading. So never risk too much of your capital at once. If you're currently familiar with the seemingly profitable trading system but somehow can't manage to be consistently profitable with it, it might be due to your mindset. So instead of trying to learn tons of new trading strategies, you could try to focus more on your psychology.
