Five Pillars of the Wealthy Trader Mindset

12/23/2010 12:01 am EST


Sam Evans

Instructor, Online Trading Academy

The most successful traders I know adhere to just a few simple rules of trading psychology. As many of my readers will know, I too like to keep my trading activities as simple and objective as possible, as this helps me to cut out the “noise” of over-analysis and emotion and helps greatly in the final decision making process. I have come to realize that in the long run, true trading success is not defined by one's hit rate of winners, the strategy employed, nor the capital management alone, but rather it lies in the mental stability the individual market speculator is able to maintain consistently.

In essence, trader psychology, in my humble opinion, accounts for around 90% of overall market success for any trader across the course of time. One could argue that risk management itself is perhaps greater in importance, and in many ways, I would wholeheartedly agree; however, I would also argue that in reality, an individual trader's true capital preservation practices are a direct result of their own personal appetite for risk, which in turn is derived from their psychological profile in the very first place. Before taking any action in the marketplace, a trader needs to fully understand their individual comfort levels and what they deem to be acceptable parameters of risk.

Some of us have a tendency to take larger financial risks in the quest for gains, while others prefer a more cautious approach in their day-to-day trading activities. With this in mind, the true question we should all ask ourselves before even contemplating the practical advantages of risk management is, "At what point will my losses make me uncomfortable?" I pose this question simply because after a potential run of successive losses, the average human being can't help but feel that they have been cheated in some way by the market, and this misconception can play havoc in maintaining sound and disciplined trading executions. The ability to analyze and place each and every trade with no concern for past outcomes is vital in the longer term. If one takes losses to heart and these drawdowns in some way blur the emotional stability of the trader, we need to question and address the ability for said trader to continue with consistent trading decisions. The last thing a speculator needs is to change their plan midway through the month as this skews the lines between objectivity and subjectivity.

So, in this simple explanation of trader psychology, I will outline a selection of the key aspects that we should all take into account and work on in our mental trading game:

NEXT: See the Five Pillars of the Wealthy Trader Mindset


1) Discipline

First, we need to learn to stick to a well-constructed and researched trading plan at all times. If this cannot be achieved consistently, there is really no point in moving forward at all. Each and every trade should be taken for reasons dictated to us by our plan—nothing more and nothing less. Anytime we deviate from this course of action, we run the risk of emotionally trading or relying too much on our gut feelings. A trader can never hope to control the markets, so instead, they need to learn to control themselves at all times. Common issues arise when trades are taken on a whim or when an individual craves the need to be right in a position and removes their stop loss order to prevent the losing trade from being closed out. And if you ever feel the need to get back at the market after a loss, then walk away or move on to another currency pair (or stock, etc.) straight away. Control your trading frequency and preserve your capital. Remember, you need cash in the account for the next day!

2) Integrity

Ask yourself right now, "Am I consistent in my trading actions?" If the answer is no, then I suggest you make the best efforts in your actions to be consistent right away. The real difference between a novice and a professional trader is that the latter knows the rules and sticks to them, while the former knows the rules and tends to ignore them. If we fail to stick to a detailed plan of action, we in turn fail to acquire a consistent and measurable set of results with which we can analyze our performance. I always tell my students that a goal without a plan is really nothing more than a hopeful wish.

3) Diligence

This area is fundamentally centered around your growth and evolution as a trader. A huge error to make is to assume that we know it all; no matter how many years of experience we are carrying. I am not perfect and I never will be, and I am the first to admit it. I know what is required to be successful in the markets and I have a plan that I have been sticking to for a number of years, but this does not mean I will sit back and rest on my laurels. Instead, I understand that while I won't deviate from my plan, I am also willing to better myself over time. The very best lessons I have learned about trading have come from my very own experiences in the markets. I am open to new lessons and insights at all times and willing to learn and develop my skills further whenever I can. I realized a long time ago that no matter how long I stay trading, I will forever and always be a student of the markets.

4) Patience

No trader can move the market or force it to do what they want it to. Often, there will be times when there are no solid low-risk, high-reward trades on offer, while other days there can be way too many to choose from. Whatever the scenario we are faced with, we need to wait for our entries and trades to present themselves to us when they are good and ready. I can’t simply pull a trade out of thin air if there is nothing to choose from. Many novice traders make the mistake of assuming that every day will be full of perfect set-ups, and this in no way is the reality. Allow price to come to you instead of just jumping in for the sake of it. And if you were thinking that the more hours you spend in front of a screen, the better you will be, then you have been truly misinformed. Take time in developing your skills, as this is far more proactive than staring at a range-bound market hoping to see something you may have missed. We all know Rome wasn't built in a day, afterall!

5) Effort

I would be a liar if I said trading did not involve some level of hard work and effort. In all aspects of life, if you want to be good at something, it takes commitment and time to learn your craft. This is certainly no "get rich quick" scheme and I advise you to ignore anybody who tells you otherwise. If you have aspirations of just rolling out of bed, clicking a few buttons, and doubling your account in the blink of an eye, then I am sorry to say that you are misguided. Don't fall into the trap of thinking that trading is easy, but take comfort in knowing that it can become easy over time, but only if you keep things simple. Anyone can be taught by a master, but this does not lead to mastery itself. That is completely dependent on the student's willingness to learn, observe, and make the effort. This is not a game of passive learning, but rather an art of active participation. Instead of searching for the non-existent Holy Grail, realize now that the real secret weapon is just all in your head.

By Sam Evans, instructor, Online Trading Academy

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