Trader Mindsets

The problem arises when those mindsets, developed over a lifetime, are in conflict with habits that are required to succeed in the new endeavor.  For some it's a relatively short lifetime of experience and for others it quite lengthy.  Nevertheless, bad habits are difficult to overcome, and that can make it very difficult to succeed as a trader.

I often write about the importance of good risk management and money management.  Someone who has spent years running up credit card debt, living beyond his/her means, or buying things to impress the neighbors obviously lacks the discipline to be careful when managing money.  I'm not suggesting a trader must be frugal.  But trading discipline is not easy for someone who spends carelessly and does not understand the importance of avoiding debt – especially at high (credit card) interest rates.  Being careful with trading dollars and getting your money's worth from the commissions and fees you pay contributes to success.  The frivolous spender may have a difficult time with that aspect.

On the other hand, it's possible that the too frugal trader may not be willing to invest money in insurance or in making adjustments.  It's certainly not frugal to take excessive risk, but an inclination to watch every penny can get in the way of trading decisions.  Maybe this is one reason why so many who advocate a frugal lifestyle also prefer passive investing.

Unless you own a portfolio of very conservative positions, occasionally (more often for aggressive traders) you find yourself in a risky situation.  It's far better to make decisions based on common sense, previously made plans, and the ability to think well under pressure.  Individuals who are accustomed to being ruled by their emotions are not going to do well under these conditions.  Thus, if you have a  mindset that allows those important, spur of the moment, decisions to be made when emotions are in control, that's deleterious to your chances of winning the trading game.  Those who have their emotions under control, are far better placed to make a good decision under pressure.

Do you have the mindset that allows sloppiness in your daily life?  Can you overcome it and become more disciplined when trading?

Do you think of trading as dealing with Monopoly money?  Is trading a game to you?  Or do you have the mindset of a gambler?  That's not the mindset of a serious trader who understands that taking big risk, and losing, can be ruinous.

Do you have an understanding of where your comfort zone lies and the importance of trading within that zone?  That's a positive mindset because it makes it easier to know when to take your profits or adjust a position.

My suggestion is simply to be aware of the recommended characteristics of a successful trader (you can find various opinions online) and be certain that you are aware of any habits that are in conflict with those desired traits.  Being aware is the first step towards not allowing those habits to interfere with your quest.

Here are some related comments from other bloggers.  

From Dr. Brett, warning investors to lose a mindset that suggests that each individual trade is a battle that must be won.  He warns traders not to become emotionally attached to the results of each individual trade, but instead to focus on the longer-term objective:

"For a successful trader, a trade is like a single pitch to a hitter. It is one part of one at bat, which is part of one inning, which is part of one game. The goal is to win the game, not to "win" on each pitch…

 

I focus on being profitable for the week and month- not on each trade, or even each day. For the active trader, there are many trades in a day and there are five days in a week. As long as you don't lose too much in a trade, you can turn the day around. As long as you keep daily losses reasonable, you have a chance for a green week. And as long as a week doesn't dig you into a deep hole, you can still be profitable on the month."

The goal is to have a successful season: that view makes it easier to shrug off the pitches that get away from you and focus on what is truly important."

 

This is good advice and corresponds to my admonition that proper risk management is the key to success.  Do not take too much risk at any one time – either when the trade is made, or after an adverse move in the market.  Your goal is to have a profitable trading/investing career.

Larry Swedloe, writing the Wise Investing blog at CBS MoneyWatch, discusses the idea of re-balancing a portfolio.  This is a technique used  by many investors who adopt asset allocation as the major method for managing risk.  (As you know, I much prefer owning collars as a method guaranteed to preserve assets.)  

Quoting David Swensen, Larry posted: “Dramatic bear markets signal the need for significant purchases of losers, while extraordinary bull markets call for substantial sales of winners. When markets make radical moves, investors demonstrate either the courage or the cowardice of their convictions.” 

It's not so easy for the average investor, with his/her emotions at their peak (euphoria or despair), to be selling into surging markets or buying when everyone else is panicking.  Yet, for true believers in asset allocation, unemotional trading is a necessity.  Most investors have the wrong mindset and get excessively bullish when markets are toppingand bearish when they are bottoming.  For anyone who likes the idea of asset allocation, re-balancing is an essential part of that methodology and the 'buy the top' mindset must be eliminated to do the job properly.  That's difficult for many investors.

John, writing The Essentials of Trading, offers this:
 

"The following was posted by a trader on a forum recently. It’s a question which comes up fairly regularly, if not in print then certainly in the minds of new traders wondering at their prospects for success: (slightly reworded) 'I heard a lot of people say 90% of traders lose money. I wonder how long and roughly how much the trader loses before becoming one of the 10% winners.' 

Of course there is no one answer to this question. How long it takes someone to reach consistent profitability has a lot to do with how much time and effort one puts into it. The more dedication to the task the faster it will tend to happen."

I find that many traders want to know how long it will take before they begin making money or before they achieve a specific trading goal.  That's the wrong mindset.  It assumes that success is coming and all the trader has to do is put in his/her time and the profits will appear.

Trading is not a job in which seniority does any good – unless you use the time on the job to learn and understand what you are doing.  The proper mindset, in my opinion, is wanting to know where the trader can find information so that he/she can read about, study -and especially – practice, various aspects of the new job (trading).  This mindset recognizes that work is required to develop the skills necessary for success. 

Related articles

• Trader’s Mindset: Oblivious To Risks
• Managing A Losing Trade
• Learn First. Trade Later
• Adaptability And Discipline
• Maybe The Market Will Turn Around
• Trader’s Mindset: Always Collect Cash

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