Hey guys! BACK at you with another highly requested blog topic. This time we’re going to talk about arguably the most important factor in any individual’s success especially when it comes to trading… Psychology!
And I can already see it coming, “Madaz, thanks for the free blog post but… Teach us some trading indicators so we can bank not this fortune cookie BS!”

And to that my friends I say…hang on a second there! Hold your horses!…Stop!… Pause!

Hear me out.

Now, I think everyone will agree, us traders LOVE our indicators.  You know, the technical tools that help tell us where to bottom tick and top tick so we can bank some serious dough.  I mean that’s why we’re traders right?!  I think we are ALL guilty of studying up and testing all sorts of setups, gadgets, and programs all in an effort to further our edge. And why wouldn’t we be? Those Big Macs ain’t paying for themselves! After all, knowledge truly IS power, especially in this industry where we look to capitalize on the lack of knowledge of others. But what good are the indicators in the world if we don’t have the capacity to use them properly or follow our plan correctly? And not because of lack of intelligence, but rather because our minds are floating somewhere in Neverland. Now, you may think I’m talking about falling asleep at our trading desks, but what i’m really talking about is a lack of purpose, a lack of confidence, and a lack of discipline. What do all of these things have in common? A poor mindset. Weak psychological foundation.

Mike Tyson famously once said, “Everyone has a plan, until they get punched in the mouth.” Let’s see how this timeless quote perfectly applies to our beloved trading.

Let’s get into it with a real world example:

Ding Ding Ding! Market opens. You see the perfect setup.  Huge gap up, great news, and massive volume. You’re thinking, I’m going long. THIS IS IT! I’m ready this time and this is THE play! You go long on this setup and over commit with size due to your anticipation, only for price to start crashing down hard. You panic. “What the hell is going on!?” Is there news?! Are they diluting?! Adam F hit piece?! Possibly one or possibly all. You hear your  your Trade-Ideas scanner going bonkers and see another stock is ripping, qualifying for a long setup. You freeze. You’re down on this trade bigger than you thought from over-sizing . You had a mental stop in mind but that’s long gone and now you are praying for a miracle just to get out with less damage or break even. You glance over and see the other stock fade into your buy zone but get cold feet, because your mind is wrecked. That trade would have been a big winner, but does that matter now? Unfortunately not!

Lets pause the story here. What went wrong?

1) Greed

Markets are cyclical. They ebb and flow at will and are constantly evolving. There are defined periods of low AND high volatility, and these periods affect our mindset greatly. For example, Summer time. Market is dead and you know that many big time Wall Streeters have gone mostly cash and moved the family to their summer homes in the Hamptons. Volume is abysmal, range is comical. But there we are trying to turn lemons into lemonade again! We know that plays are scarce, so we over commit to the few things that are moving, leaving our trading business highly over exposed to losses. Fear of Missing Out. We’ve all heard this many times but its worth reiterating; take what the market gives you. Yet, that does not mean take what the market gives you and go for a home run on every trade. That also does not mean over commitment to plays if you end up so deep in the trenches that you may not make it back out if your plan does not work, Consider this, the market that you’re over sizing on due to lack of plays? Well, how can you attempt to make back losses when there’s nothing to trade? That’s when we start to force whats not even there in the first place. Low volume and low volatility means pump the brakes!

2) Lack of Purpose

Remember Mike Tyson’s quote? Well, here it comes.. BOOM. At the open you had a plan, but once you got hit in the mouth, so to speak, it all went out the window. All of a sudden you realize your size was far too big, and you refused to stop out. We all must have purpose. When going long, there must be a reason, a rationale for going long and its far beyond saying something like “It was going higher so I bought it.”  Yeah guys, not going to cut it! Part of this plan is figuring out and understanding when things do NOT work. Now, as traders none of us are completely immune to poor decision making, or placing bad trades. We are also not immune to when things don’t work how we thought they would. But we MUST have a systematic approach to all of our decisions. We can be fully committed to our trading ideas, but we must know how to identify when these ideas are no longer valid!

3) Lack of Confidence

In our story, there was another trade that qualified for a long setup, in which we did not take. This is a true lack of confidence in approach. Few people mention the importance of confidence in trading. The confidence to attack, the confidence to size, and the confidence to cut a loser because we know that if we follow our guidelines, another great trade is right around the corner. In life, people who suffer from a lack of confidence put themselves at a distinct disadvantage to those that don’t.  Trading is no different.  So Madaz, how do traders build confidence you ask? Many think its making money — Nope. It’s by data tracking and keeping a trading journal (more on this in the future). It’s by proving objectively and without a doubt that our approach works over a large sample size. This is paramount to confidence. When you see a trader talking about a loss but stating that he or she followed their plan and are content with the outcome, that my friends, is healthy trading! They have purpose and they have confidence in their system. In other words, they know that their setup wins either more times than it loses (Higher win rate, lower RRR) or pays far greater when it wins than the money it loses when it does not work (Lower win rate, higher RRR). They have what we call true confidence in their approach and that dictates their decision making.

Concluding Thoughts…

As you can see, its not just about what the markets are doing, and its also not just about the tools we have. Its about how we react and why, and the emotions and mental approach we carry into our trades. The best system in the world means nothing if not followed, so we need to look inwards to define what can be solved within out mindset. I hope everyone has enjoyed this short blog on trading Psychology and why its so important to identify and try to master it!  As firm believer that psychology is THE most critical component to successful trading, I will plan on exploring the specifics of this subject in more detail later!   So be on the lookout for that.

Let me know what you guys want me to write about next and make sure to stop by and tell me how your #NoBlowUpChallenge is coming!

Your friend,

Madaz