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by Tom Carr - Jan 29, 2004

Greetings Befriend the Trend Traders! We hope this article finds you healthy, happy and trading well!

Today we are going to talk about:

Mastering the Winning Trader's Mindset

How are you feeling today? Happy? Sad? Angry? Tranquil? Have you ever thought about how your daily moods might affect your trading? It is certainly something to consider. Of course, the essential arrow in any winning trader's quiver is a sound, well-tested trading strategy, along with the discipline to stick to it's plan for trade execution and management. But complimenting one's strategy must be the proper mental attitude. You may know a lot about the markets. You may be a master at fundamental or technical analysis, or both. You may possess that subtle intuition for stock movements that marks so many successful traders. But even the most intelligent, competent, motivated traders can be reduced to bankruptcy by failing to heed the emotional signals that forewarn of poor trading decisions.

Overtrading, undertrading, exiting too early, entering too late: these are usually symptoms not of a faulty trading system but of a faulty trading mindset. So just what are the parameters of a winning trader's mindset? In his excellent book, Trading in the Zone, Mark Douglas identifies what he calls the "four primary trading fears" that are responsible for most of our trading errors. They are, "the fear of being wrong", the "fear of losing money", "the fear of missing out", and the "fear of leaving money on the table". He goes on to say that the essential difference between the consistent winners and the consistent losers in the trading game is this: "The best traders aren't afraid!"

So how do we overcome the fear that so many of us naturally bring to the markets? Here is a quick list of suggestions:

1. In your analysis of each potential trade, ask yourself, "What have I done to eliminate as much risk as possible?" Risk breeds fear, as well it should. And there are a variety of ways to reduce it. Primary among these are to be sure that your entry price is the best possible price available given the recent historical movement of the market you are trading. If you are trading a breakout, be sure to set your stop entry beyond any potential reversal or pivot points. If a reversal, be sure wait until confirmation of that reversal is obtained. Of course, the use of prudent stops is always a part of any risk managements plan.

2. Avoid going too heavy into any one position. I teach my clients to divide their account by the number of trades they plan on holding at any one time, and then to only put this amount into each trade. And when you hit a losing streak, and all traders hit losing streaks, consider reducing that amount. Mark Cook, famed S&P trader, has a sign on his computer terminal that says simply, "Get Smaller!" That is great advice for all of us.

3. Avoid trading altogether when you find yourself in any of the following "moods":

You are angry or frustrated about something
You have financial concerns or worries about debts
You are not feeling well physically
You are 100% certain of the market's direction (you aren't!)
You feel like a "victim" of the markets

4. It is a simple dictum but worth repeating here, "Trade the plan, and plan the trade". One way to concretize this motto is to keep a trading journal. Write out the reasons for entering a new trade before you enter the trade, including notes about the risks and rewards of the trade. Update these entries at the end of each day. Adjust your stops and targets accordingly. Markets are very pliable, organic entities, and their evolutionary development needs to be monitored closely to avoid feeling at their mercy.

That's it. Keep it simple. Stick to the plan. And remember, if you want to trade for a living, you need to trade for life!