Although all emotions have a physiological aspect, emotions don’t arise in a social vacuum. They are a function of a person’s relationship to his or her environment. Emotions have adaptive utility. In the wild, for example, humans had to decide whether to fight an opponent or flee to safety. Fear and anxiety happen when we perceive that we may be facing impending doom. We become energized. We focus on examining our options, and take quick, decisive action. When it comes to trading, however, fear isn’t always useful. Many traders become fearful when they perceive that a loss is imminent. When a loss is clearly going to happen, it is useful to close out a trade as soon as possible. But many times, traders tend to follow the crowd. They see other traders selling, and just as members of the herd follow the leader, they sell as others are selling, and buy when others are buying. The masses are motivated by fear. The winning trader, however, capitalizes on fear.

Winning traders learn to sell while others are buying and buy when others are selling (in general, that is; it’s not quite that simple). The winning trader uses the fear of others to his or her advantage and doesn’t act on his or her own fear. It is reasonable to be fearful when your money is on the line. That’s why winning traders protect themselves by trading with a detailed trading plan and managing risk. By taking proactive steps to minimize risk, they trade more effortlessly and with less fear.

Anger and disappointment are two additional emotions that powerfully influence trading decisions. Both emotions concern expectations about our performance and how we expect the market to behave. We become angry when things don’t go our way. Because we want to win, we hope that the market will behave in a manner consistent with our trading plan. When we feel that fate, or some unidentified external forces (such as other traders or market makers, for example), has created a situation that thwarts our plans, we become angry.

When we think we ruined our own plans because of our incompetence, we feel disappointed. Regardless, there’s a natural inclination to want to control our destiny, and when it comes to trading, we want to control the market. We may want to impose our will onto the market. The market, however, can’t be controlled. One must accept what the market has to offer. You cannot make the market do what you want it to do.

If you accept that you are powerless over market action, you’ll be less angry or disappointed. If you anticipate and truly accept the fact that the market can, and often will, go against your trading plan, and that it isn’t personal, you’ll not be fazed by it. You’ll just accept it, and move on. If, on the other hand, you expect the market to move in your favour, you’ll feel angry and disappointed, which often leads to feelings of revenge or despair. These emotions can be paralyzing. It is better to accept the market for what it is, take precautions (again, control risk and trade a detailed trading plan), and be ready to accept the results you achieve, good or bad, and just move on to the next trade.

Emotions are a natural part of trading. As much as we painstakingly plan our trades, the market doesn’t always meet our expectations. Indeed, it is more likely that the market will fail to meet our expectations than behave in accordance with our plans. If you accept this fact, however, and take proper precautions to work around it, you’ll be able to minimize the influence of emotions. You’ll trade more effortlessly, creatively, and profitably.

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There are psychological reasons for staying out of the markets. Some days you may be tired, feeling down, or just not feeling at your best. It’s at these times that you may not be able to maintain the positive, objective mindset you need for trading. You may act emotionally or impulsively because your psychological resources are depleted.

Some may be tempted to work through such a slump and put on trades even though one is not in the right mental state, but that could mean putting on bad trade after bad trade. Not only will your account balance take hits, but your ego as well. The next day, when you are feeling up to par, you may feel the residue of the slump when you look at your account balance. And that can create feelings of stress on a day when you would have otherwise felt carefree, optimistic, and ready to take on the markets in earnest. For the most part, it’s better to stand aside when your spirits are down, and start new and refreshed when you are once again feeling at your best.

Another good reason to stay out of the markets is when your method seems to lose its winning edge. No trading method works indefinitely. When market conditions change, even a “foolproof” method can stop working. Many novice traders make this situation even worse by continuing to trade. When a method stops working, it can really stop working. Your account balance will decline with each trade. Another mistake is to lose your cool when your method stops working. Rather than view such events as a time for worry and self-doubt, it’s wise to view them as an intellectual challenge. Seasoned professionals often say that they are at their best when their old method starts to falter and they have to devise a new one. They view the situation as a puzzle they must solve.

They step away from the markets and take a close look at their methods. They try to identify what went wrong with the method and look forward to tweaking it until it works again. They search for market factors that may have changed, and when they think they have found the solution, they put on a few small trades to test out their new, revised method. So when your method stops working, don’t continue trading at the same level of activity. Step back, look things over, and wait until conditions are just right before entering.

Trading profitably requires that you monitor the market moods and your psychological moods. When either one is not conducive to trading, it’s best to stand aside and wait for the situation to change. Don’t make the mistake of thinking you should trade even in these potentially debilitating conditions. By staying out of the markets, you can survive to trade another day, when you’re in a peak performance mental state and the market conditions are optimal.

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How do you become tougher emotionally? According to Dr Loehr, there are four indicators of emotional toughness: flexibility, responsiveness, strength, and resilience. By working on each of these areas, you can develop the emotional skills you need to improve your performance.

Emotional flexibility is the ability to be open, expansive, and non-defensive in the face of a crisis. There’s a strong tendency to blow a minor setback out of proportion and respond inflexibly. For example, when our trading strategy goes awry, or we face a temporary drawdown, our first inclination is to avoid the problem, rather than experience a range of emotions, such as a fighting spirit, humour, or enthusiasm. It’s important to experience a little bit of fear, but once you go there, it’s even more vital to think creatively, problem-solve and get past it. If you are open to different emotions, you’ll have an easier time moving forward, rather than remaining stuck and paralyzed.

It’s also important to be emotionally responsive. When facing a crisis, many people want to shut out their emotional experience. They are withdrawn and distant, estranged from their ongoing experience. But it’s essential to remain open to experience and ready to respond actively and creatively. If your trading method is failing, for example, it’s important to energetically try to revise it. You must actively study the markets, be open to current market conditions and accept them. Once you connect emotionally with the markets, you can find new solutions that weren’t obvious at first glance.

When facing a crisis, even a minor one, emotional strength and resiliency allow you to constantly exert a positive force to change matters. Rather than back down in defeat, it’s vital to show unfailing persistence. You must be able to quickly bounce back from a setback. Rather than be deterred, you must keep your overall goal in mind and keep striving for it.

Winning traders are emotionally tough. They are open to a wide range of emotions, stay connected to their ongoing experience, stay positive, and bounce back from a setback quickly and easily. The more you can build emotional toughness, the more rapidly you can enhance your trading performance.

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In a top-down approach, the goal is to pick a stock that will outperform general economic trends. By looking at the general economic trend first, one can then determine which specific industries or sectors will outperform the general trend. Stocks that are attractive within that industry sector are then purchased. From a technical point of view, a top-down investor first analyzes the trend of the entire market, followed by the trend of the sector, and finally the trend of specific stocks.

A bottom-up approach is more like a treasure hunt. One looks at the stocks first, followed by the sector and then the market. A fundamental analyst might begin the hunt by sifting through hundreds, if not thousands of stocks, screening for candidates with a low P/E, high dividend rate or examine dozens of other available quantitative studies. A technical analyst will either scan an equally large number of charts for breakouts, breakdowns, pullbacks, snapback rallies, unusual volume activity, or hundreds of other technical studies.

So which approach is better, analyzing the macro picture first or taking a look at the individual stocks first? The answer isn’t clear-cut. It depends on your objectives and anticipated time in a trade. For short-term trading, however, a bottom-up approach is preferred. Here’s an example from the Philadelphia Semiconductor Index (SOX) to show the advantages of a bottom-up approach. The SOX is a price-weighted index composed of companies primarily involved in the design, distribution, manufacture, and sale of semiconductors.

The action of the semiconductor stocks often leads the Nasdaq, since activity in the semiconductor industry can have a relatively huge impact on Nasdaq companies. Since it leads the Nasdaq, it is more important to look at the SOX first in order to come up with trading ideas; that is, look from the bottom up. If you wait for confirmation of a strong Nasdaq, before buying a semiconductor stock, you will usually be late entering the trade, which increases risk and decreases profit potential.

Similarly, you should also look at individual component stocks of the SOX before looking for confirmation by a strong SOX. The semiconductor component stock in which you invest depends on its relative weighting in the SOX. For example, KLA-Tencor (KLAC) or Maxim Integrated Products (MXIM) are the heaviest weighted component stocks in the SOX (accounting for 21.3%) and tend to lead the index. Is it wise to wait for the SOX to confirm the strength of these individual stocks?

No. Since they lead the index, it doesn’t make sense to wait. These leading stocks have already made a major move. It might be a good idea to look for stocks in the sector that have not yet moved. The stocks that typically move last in a sector are those that are less important in overall weightings, such as Advanced Micro Devices (AMD) or LSI Logic (LSI), which have a combined weighting of just 4.72%. In the case of AMD and LSI, which might lag the performance of the SOX, one is likely to find profitable trades after the index has moved.

When trading in the short term, it is crucial to remember that timing is important. And since certain component stocks tend to lead any particular index, the bottom-up approach will help you identify the best opportunities.

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Tom a seasoned trader told Innerworth staff, “Every time I have issues with confidence, I become overconfident. I try to be very humble when I trade. You’re only as good as your last trade. It doesn’t matter what you did last month, last year, or the last ten years, it’s what are you doing today.” But Tom does not lack confidence. He may get beaten down, but he doesn’t stay down for very long: “I get worried or depressed for a very short period of time. Rather than dwell on it, I immediately shift my focus and think, ‘Okay, fine, let’s see how we can get out of this?’ What’s done is done.”

Although overconfidence can lead to risky trades that may produce losses occasionally, a lack of confidence can be even more detrimental. It’s probably not a good idea to be optimistic to the point of putting on trades without carefully managing risk, such as limiting the size of a position or using protective stops, but a moderate amount of optimism and confidence is useful.

Dr James Felton of Central Michigan University, and colleagues (2003), point out that pessimists often panic, become fearful, and tenaciously deny they are in a losing trade. A moderate amount of optimism keeps a trader calm and inquisitive. Even in the midst of a losing trade, an optimist may be more likely to seek out information and make an informed decision. Finding the proper level of confidence is key. It is a little like walking a tightrope between extreme unrealistic optimism and extreme debilitating pessimism. Finding the right balance will allow you to pick yourself up when you are beaten down, but stay grounded in reality even after a huge win.

The winning trader is both confident and realistic. If you want to trade like a winner, it’s vital that you develop a true sense of self-confidence. By gaining a wealth of experience, your confidence will be based on your actual trading skills. When you know what you can do and what you can’t, you’ll feel calm and self-assured. You’ll know what you can handle, and you will be able to trade with solid, realistic confidence.

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When you find risk-taking particularly fearful, it’s hard to concentrate. You are continually on edge and tempted to close out a trade just to end the uneasiness. Part of risk tolerance is biological and part of it is socially learned. Some people are easily agitated and once they become anxious, they find it difficult to calm down. They continue to remain anxious and on edge, even when a threatening event has passed. If you are easily agitated, it’s useful to take precautions to reduce your propensity for over-stimulation. The mind and body go together and there are many ways to reduce your overall level of agitation. For example, if you exercise, avoid caffeine, meditate, eat nutritiously and get plenty of rest, you will stay more relaxed. That said, it’s hard to fight biology. If you’ve always been the kind of person who gets anxious easily, you’ll have to find a way to work around this aspect of your personality.

If you find taking risks especially difficult and extremely anxiety-provoking, you may need to adapt your trading style to fit your physiology. There’s no one right way to do this. It depends on your preferences. But one issue to consider is the length of time you stay exposed to risk. The longer a trade, the more risk involved. Scalpers, for example, take minimum risk. They get in and get out of the market as fast as possible. Some anxiety-prone people may find this kind of fast-paced trading especially stressful, but others may find it appealing. You don’t have to wait very long to see how a trade turns out.

At the other extreme, long term investing can be another option. Some companies have relatively consistent long-term trends. By doing some simple homework, you can identify a few solid companies and use a buy-and-hold strategy. After you buy the stocks, make a conscious decision to restrict the number of times you look at the price. You might decide to look only a few times a year, for example. Looking at how the stocks are doing can be a lot like looking at a slot machine or roulette wheel.

When you look at it, you’ll feel anxious as you anticipate what might happen. But if you avoid looking, you’ll see the grain of truth in the saying, “out of sight, out of mind.” That’s not all you need to do, however. You will also find it useful to put a stop loss in place to limit your risk. Defining the amount of risk you are taking upfront will help you tolerate risk. (Remember, though, that you must account for volatility over the course of the trade. It’s impossible to completely eliminate all risk. You must find a happy medium between getting stopped out too early or allowing your investment to fall in value to an uncomfortable level.)

There’s one last thing you can do: Accept the fact that should the market go against you, you will definitely lose the portion of capital that isn’t protected by your stop-loss. In the end, you must accept that you may lose. One of the main reasons people have difficulty taking a risk is that they are afraid of the consequences of a potential loss.

They wonder what they would tell their spouse or their parents should they lose. They wonder what they would need to do to make back the lost money. It is vital that you trade with money you don’t mind losing. If you can truly believe that losing the money is no big deal, you’ll be able to tolerate the risk, even if you have an extremely low-risk tolerance. But if you can’t afford to lose the portion of your capital you are risking on the trade, don’t risk it. You will never be able to convince yourself that it is a good idea, and if you have low-risk tolerance, you will just be putting yourself in agonizing pain.

Extremely low-risk tolerance can severely hamper trading, but if you take the proper precautions, you can still trade profitably. By finding a trading style that suits your personality and only risking money you can afford to lose, you’ll feel calm enough to trade freely and profitably.

The post Risk Tolerance: Knowing Your Limitations and Working Around Them appeared first on Varsity by Zerodha.

Perhaps the main reason traders don’t take timely action is because they dwell too much on their mistakes. It’s important to learn from one’s mistakes, but many times there’s only so much you can learn from a losing trade. If you failed to manage risk, had a poorly defined trading plan, or impulsively put on a trade, then, by all means, don’t make these mistakes again. Fix the problem as soon as possible.

There are other times, however, that a trader does everything “right” and accounts for all possibilities, yet an unforeseen factor undermines one’s trading plan. In those cases, there’s no need to over-analyze such past losing trades. There’s little you can learn, and you’ll probably do nothing more than shake your confidence by repeatedly reviewing the trade. It’s better to build up your confidence by fearlessly making trade after trade. Extreme self-reproach will just use up your limited psychological energy. Nobody’s perfect, and even the most “perfect” of traders will face losses occasionally.

Throughout our lives, we are taught that prudent decision-making requires careful deliberation of all possible options. It’s not a good idea to impulsively put on trades on a whim. On the other hand, too much deliberation uses up limited psychological energy. When you spend time and energy tediously reviewing your options over and over again, you don’t have enough time and energy left to make a precise trading plan. It’s sometimes better to decide which trading opportunity to take and then immediately focus your remaining energy on specifying every part of your trading plan, such as entry strategies, exit strategies, and risk control. Don’t be wishy-washy. Decide which opportunity you want to take, specify a detailed trading plan, and put on the trade in a timely fashion.

It’s vital for trading success to show discipline and self-control, but it’s also essential to execute trades in a timely manner. When you spend too much of your energy mulling over past mistakes or unnecessarily pondering your options, you end up wasting time and energy that is better spent outlining a trading plan and executing it. Timely action will ensure you stay profitable, so don’t hold back, take action.

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In many occupations, the more work you put in, the more payoffs you’ll realize. If you are in sales, the more cold calls you make, the higher your potential sales. If you are a construction worker, the more hours you put in on the job, the more money you take home each week. In many ways, trading is quite different. There isn’t a one-to-one correspondence between the amount of work you put in and the profits you’ll pile on. You must prioritize. For example, you don’t need to spend several hours monitoring media coverage of the market if it doesn’t directly lead to a profit. Most of it is for entertainment value only, so spending hours reading or viewing the latest media hype is a waste of valuable time. You need to work efficiently and make sure that the time you spend learning about trading and the market does indeed pay off.

Trading isn’t a 40-hour a week job. It’s not a matter of putting in 40 hours a week and getting a steady paycheck. It’s about reaching a specific objective, no matter how much time it takes. For instance, if it takes only 15 minutes for a skilled trader to make enough profit to have a year’s worth of living expenses, so be it. Seasoned traders don’t have to spend 40 hours a week to make a living if they have the requisite skills (and novice traders may need to put in more time building up these requisite skills). The point is that if you’re a novice trader, you can’t work under the assumption that everything you do will have a direct payoff. There are only so many hours in the day, so you must spend your time efficiently. Don’t waste your limited time in activities that won’t have a direct payoff. 

For example, if you’re an intraday or swing trader, it doesn’t make sense to read about the markets and world events that have no direct bearing on the intra-day or intra-week prices of the stocks you want to trade. Similarly, sifting through stock charts that have no bearing on the stocks one trades is also time misspent. Avoid information overload. You need to maintain focus and efficiency. Trade a few key stocks, and know everything you can know about those key stocks. Become an amateur specialist. Memorize the chart patterns, how the prices fluctuate during the day, and the factors that coincide with the price changes. Knowing about stocks you don’t plan to trade or about broader economic events that don’t influence your key stocks will take the time that, realistically, you just don’t have.

Trading is a challenge that requires hard work and persistence. It is essential to manage your time and energy wisely. Focus on what matters most. Don’t be distracted by learning additional trading strategies that you will never use, or new indicators that are redundant with basic indicators of trend. And don’t believe you must keep up with all the media hype. Working efficiently will ensure that you will build the skills you need to become a consistently profitable trader.

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Trading platforms make it very easy to move quickly across multiple time frames or to store certain charts of varying time frames for later viewing. Looking at multiple time frames can provide a feeling of psychological security. We can look across time frames for trend alignment. For good trades to follow through and present valid opportunities it’s desirable to see traders from various disciplines and perspectives move in the same direction. For example, we ideally want to see a bullish trend at all levels from the monthly charts down to the minute to minute. Observing such consistency confirms our perceptions. We don’t want to see mixed signals across different time frames; that’s when traders of varying styles struggle with what to do next, going back and forth. We would like to see clear pictures, which suggests a unanimous opinion and that the majority are decisively going in one direction.

Timing is critical to trading. Short-term traders try to spot a breakout move or a condition setting up from a monthly or weekly chart, and then try to capitalize on the early stages of that larger potential move. They try to participate in the first few days of what may turn out to be a large monthly move or may try to participate in the first five hours of what may turn out to be a large weekly move. We want to trade the impulse move before the word gets out, and others come to the trade. The energy is in the early part of the move. It dissipates later. It’s vital to get in at the start of the move before it ends. Looking at multiple time frames helps you identify this critical point in time.

So remember, there isn’t one absolutely correct time frame to look at. It all depends on the context. Focusing on the larger picture that may be unfolding on charts may give you an edge in anticipating what is happening at a lower time frame. By being open to many different time frames, you’ll be more likely to see potential moves. You will have a more comprehensive feel for the markets as a whole, and this will help you anticipate where the market will go next.

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One of the most effective ways to cope with time pressure is to change your time perception. Time perception is the degree to which people perceive their use of time as structured and as contributing to a specific goal or set of goals. The more people perceive their time as structured and their actions as aimed toward a specific purpose, the less stress they experience and the more satisfied they feel. As a trader, it is useful to gain awareness of how you perceive time and make sure that you see your actions as meeting specific trading goals.

Trading has advantages compared to most jobs. Traders are free to work on their own terms. They don’t have to satisfy the expectations of supervisors or punch a time clock. As bothersome as these constraints may seem, however, they do have some advantages. In many traditional work environments, time is well structured, and the purpose of work tasks is relatively straightforward. A clear routine is set and it’s easy to follow. Trading can also be structured and meaningful, but there is a danger of these important psychological elements being lost when one embarks on a trading career. Novice traders, especially, may not organize their trading activities in the same way as they would for a traditional job. They may not follow a strict routine, set clearly defined goals, or try to meet specific deadlines. For some traders, time may seem to slip away. When this happens, one may feel as if he or she has accomplished very little during the day, and eventually, this can produce uneasiness and stress.

Do you feel that your time is basically without structure? Do you feel as if you put in a lot of effort, yet are not making adequate progress toward your goals? When you look back at your daily activities, do you question what you are working toward? If you answered “yes” to any of these questions, you probably feel time pressure and may have a problem with time management. You may feel confused and unorganized, and this may produce unnecessary stress. If you have a problem with time management, you may want to try a few simple time management strategies to structure your time and relieve some of the time pressure.

An important step is setting clear priorities. Your priorities as a trader, however, should be based on whether you are a novice or advanced trader. A novice trader, for example, should devote a fixed amount of time to learning about new trading strategies, while a more seasoned trader may know which specific methods he or she will use and can devote less time to this activity. It is also important to set a specific amount of time aside for each goal; otherwise, you may spend all your time on one goal at the expense of others. For example, one cannot merely study trading strategies without testing them out in the markets, so it is important to set aside time for both learning about new strategies and actually trading them.

However you spend your time, it’s essential that you set time limits for each goal, and that you monitor the amount of time you spend on each one. As you systematically complete each task, you will naturally reward yourself, and at the end of the day, you will feel that you have achieved a meaningful goal. And in turn, you will find that you will enjoy the process of trading. Rather than merely looking at the equity in your account as the all-important gauge of your performance, you will gain a feeling of mastery just by completing various tasks you deem as valuable for developing your skills as a trader. Everything will start to feel as if it is coming together into a whole.

It’s important to view time as structured and as having a purpose. This perception can be maintained if one uses time management techniques, such as listing specific goals, ranking each goal in terms of your priorities, setting deadlines for each goal, and rewarding oneself when the goal is completed. When you perceive your time is structured, you will feel less stress and feel more satisfied with your overall trading experience. And this in turn will help you cultivate the positive mindset you need to trade profitably and consistently.

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Some novice traders make the mistake of thinking that they can approach trading as if it were a regular 40-hour a week job: You put in 40 hours and you pick up a paycheck. Trading doesn’t work that way, however. It actually doesn’t matter how much time you put in. The bottom line is whether you make enough profitable trades to make a living.

You either can do it or you can’t; it’s merely a matter of skill and preparation. There isn’t always a precise one to one correspondence between the amount of time a trader puts in and the number of profits one makes. For instance, if it takes only 15 minutes for a skilled, seasoned trader to make enough profit to meet a year’s worth of living expenses, then so be it. Seasoned traders don’t have to spend 40 hours a week to make a living if they have the requisite skills. Novice traders, on the other hand, can put in 80 hours a week and see nothing for the effort. If you’re a novice trader, you can’t work under the assumption that everything you do will have a direct payoff.

You must also consider the total number of hours you can work is limited. You must spend your available time efficiently. Many novices try to do too much of the wrong thing. For example, they may waste precious time and energy reading about the markets and world events that have no direct bearing on the intra-day or intra-week prices of the stocks they plan on trading. Similarly, sifting through stock charts that have no bearing on the stocks one trades is also wasted time. You can’t be overloaded by information.

You need to maintain focus and efficiency. Trade a few key stocks, and know everything you can know about those key stocks. Become an amateur specialist. Memorize the chart patterns, how the prices change during the day, and the factors that coincide with the price changes. Knowing about stocks you don’t plan to trade or about broader economic events that don’t influence your key stocks will use up time that, realistically, you just don’t have.

Trading is a challenging profession, and you need to focus your psychological energy on what matters most. You can’t waste your time on distracting information, or activities that don’t eventually produce a direct payoff. Don’t be sidetracked by learning additional trading strategies that you will never use, or new indicators that are redundant with basic indicators of trend. And don’t believe you must keep up with all the media hype. Focus, work efficiently, and in time you will build the skills you need to become a consistently profitable trader.

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To some extent, trading is a matter of taking advantage of probabilities. And making the law of large numbers work for you requires you to make trade after trade, over and over again. Just like onerously bolting on wheels on an automobile assembly line, making a series of trades can be tedious, however. It may be hard to maintain self-control at times. It is understandable. You are human, and humans have a strong primal urge to seek out drama and intrigue. In addition, the kind of person who is attracted to trading isn’t the kind of person who prefers tedium to excitement.

If you are a trader, you’re probably the kind of person who has shunned a mundane 9-to-5 job for a more unconventional, adventurous profession. The excitement of working as a full time, active trader appeals to you. You thrive on the uncertainty and endless possibilities. What attracts you to trading, however, may also be your downfall, unless you are careful. You may be the kind of person who gets bored easily. It’s possible that the long hours of self-control required to make a profit may be difficult to maintain. If you aren’t careful, you may want to break out impulsively at critical moments of trading.

For some people, trading stocks is a means of finding thrills and excitement. The search for drama is a prevalent human need. We don’t like boredom. It’s unpleasant, and when we feel bored, we do whatever we can to find excitement. The masses look to the markets for drama. Many people invest in the markets for entertainment. They enjoy putting on a position just to see what happens. It’s similar to playing a slot machine or buying a lottery ticket. Professional traders take it more seriously, though. They capitalize on the fact that a primary motivation of the masses is to seek out excitement and drama.

Whether they are fully conscious of it or not, the masses enjoy the drama of buying and selling stocks, even if it means losing in the end. What you need to decide as an active trader, however, is whether you want to be part of the group that gives into their need for drama and loses money in the long run, or the group of active, professional traders who maintain self control and watch money flow from the masses’ trading accounts into their pockets. Professionals make big profits from the irrational and emotional reactions of the masses. The masses may want drama, but you want profits. And that means taking a cold, rational, planned approach to trading the markets.

It is vital for your survival that you leave your emotions at the door, and trade like a pro. Develop a well-defined trading plan and stick with it. Cultivate a sense of healthy skepticism. Don’t believe that all setups are equal. Only trade the best setups. You may want to jump in and make a trade even though market conditions aren’t optimal. When you get the urge, however, it is vital that you hold back. Don’t jump in. Maintain self-control. The more you can fight the urge to seek out thrills and excitement, the more you’ll cultivate the calm, rational mindset of a winning trader.

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Psychologists have studied the dynamics of thrill seeking. Some people have a natural born affinity to seek out risk. They have difficulty controlling their impulses and are quick to act without thinking. That said, many people, especially traders, have trouble maintaining discipline. Research studies have shown that despite the claims of pop psychologists, people have trouble controlling their drinking, eating, and smoking. Sure, there are some people who have no problem with discipline in these areas. It’s a matter of biology, but many people have trouble maintaining discipline. Is it hopeless? No. Psychologists suggest looking at your limitations regarding discipline, and taking active, preventative steps to maintain discipline.

When trying to maintain discipline, many people make the mistake of trying to do too much at too fast a pace. People think they have super-human strength when it comes to discipline. But, in reality, the ability to maintain discipline is a fixed resource. Just like physical strength, you can only maintain discipline for so long before your ability to stay controlled fails you.

For example, if you work all day long, and keep under control, you are bound to want to go wild at the end of the day. That’s all right. It’s natural to want to celebrate. The mistake, though, is thinking that there are no ramifications for maintaining strict discipline for long amounts of time. You can’t keep strict discipline forever. At some point, you need a break. Obviously, just like building up muscles, practicing discipline allows you to get better at it. But it is vital to know your limits. You can only be disciplined for so long before you naturally want to break out and act on impulse.

What are a few ways to stay disciplined when you need to? First, always get plenty of rest. When you are tired, you are prone to impulsive decisions. Don’t skip sleep. It’s the key to maintaining discipline. Second, remove stress from your everyday life. This is easier said than done, but if you feel stressed out, you won’t have enough psychological energy to maintain discipline. You’ll be on the verge of seeking out a thrill to make yourself feel better. Third, don’t try to be disciplined for too long. When you try to live a monastic life as a trader, you will eventually feel a need to alleviate the monotony and boredom. When you feel bored, you are likely to make an impulsive trade and lose money.

The best preventive step is to restrict the amount of time you trade. If you find it hard to maintain discipline for an entire week, for example, then don’t try to trade with extreme discipline for two weeks. It will take all the psychological energy you can muster to make it for the week. Don’t make matters worse by pushing yourself to go for two weeks. You’ll increase the odds of making impulsive trading decisions. Instead, trade for a week, take some time off, and then return after you’ve had some time to recover. It’s just like building up muscles. Work out, rest, and go back and work out a little more. If you “work out” your discipline muscles in moderation, you’ll make more progress. So avoid seeking out thrills. Trade with discipline and you’ll trade to win.

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Jake is a pessimist. He wants to become a profitable trader, but his attitude gets in the way. He thinks, “I just don’t have the talent to trade profitably.” Jake bases his assumptions on the fact that he traded for an entire year and ended up blowing out his account twice. He believes that his past performance “proves” that he has no future as a trader. But he’s still not ready to give up. A voice deep down tells him to keep trying, but Jake has trouble listening. He pursues trading earnestly but in a closed, defensive way.

Rather than embracing the profession, he holds back. Rather than taking risks, he avoids risks at all costs. He is consumed with losing, and truly believes that it is just a matter of time before he blows out once again. He is complacently waiting to lose. What Jake needs to do is think creatively. He needs to look forward to honing his skills. He should be open and excited about what he is going to learn next. It may be true that he will face many more losing trades in the future, but it is all part of the process. He can’t learn how to trade like a winner sitting still. He must go out and take risks.

Steve is an optimist. Unfortunately, though, he is an unrealistic optimist. He has a “can-do” attitude. He believes that he was meant to be a trader, but he mistakenly thinks that a positive attitude by itself can make his dreams come true. He expects winning trades in the future, and rarely believes he will face a setback. The problem is that his positive attitude isn’t allowing him to fully realize his goals. He continues to lose money. Why? A positive attitude can keep you persisting in the face of setbacks, but it’s unrealistic to think that trading offers a way of making easy money. Trading is hard work. You have to be thick-skinned and be willing to hone your trading skills. You must be willing to put in long hours and develop an intuitive feel for the markets. You must also be willing to face the fact that developing your skills is not going to happen over night.

Paul is optimistic but also a realist. He knows that profitable trading isn’t something that is going to come easy. He expects to lose money and face setback after setback. He doesn’t know when he will fully master the markets, but he knows that if he keeps at it, he will eventually become a profitable, seasoned trader. He is mentally prepared for any outcome. He knows he may blow out his account a few times, but he figures that it’s just tuition he has to pay for learning how to trade profitably. For him, trading is something he can learn to do. He doesn’t believe that he is a natural born trader, but he believes that with enough hard work and determination, he’ll become a seasoned trader.

Of the three traders, Paul is likely to make it. Steve is an optimist, but he has a Pollyanna attitude. He will stay happy for a while, but eventually he will face so many setbacks that his optimistic attitude will turn into deep discouragement. He thinks trading is easier than it is, and is not prepared to put in the commitment he needs to gain mastery. Jake is so much of a pessimist that he doesn’t even try, and because he doesn’t try, he will never hone his trading skills. Paul has a positive attitude, but he knows how hard trading is.

He expects to see setbacks, but because he knows that trading is hard work, he is ready psychologically to accept that obstacles are commonplace, and he is willing to overcome any obstacle. The right attitude is essential for trading success. It’s not impossible to master the markets, but it isn’t easy either. By holding an optimistic yet realistic view, you’ll be able to accept how tough trading is, but at the same time persist until you overcome every obstacle.

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But as tempting as it is, it’s useful to calm down and take decisive action to protect yourself. This metaphor works for the markets. Oftentimes, the market action does not go our way. The masses may not react to the news about a stock in the way we had hoped, or some major world crisis may nudge the market the wrong way. You have two choices: you can get angry and start thinking of a way to get even or you can calm down, figure out how to deal with it, and react decisively.

Winning traders don’t succumb to their emotions. They aren’t thrown off track by unexpected events. They approach the markets with a detached, unemotional, and rational mindset. Cultivating such a mindset is easier said than done, however. Just like battling inconsiderate drivers on the road, it can be difficult to contain your emotions at times. Your money is on the line, and it naturally puts a person on edge.  You try to think, “What can happen? So what if I lose a little money. I can take the loss in stride,” but it’s hard not to react emotionally.

Rather than react emotionally, you need to step out of your current mindset and look at yourself objectively with a third eye as if you are a character in a movie. How can you do it? Again, it’s hard to see things from a third eye when too much is on the line. When you are on edge and a little afraid, your mind tends to shut out part of your perspective.

You focus on defending yourself and that usually means denying the trouble you are in and looking at events through rose coloured glasses. By reducing financial and personal risk, you will increase your ability to move out of your current mindset and see things from a new perspective. It’s also important to always be ready to see things from a new perspective.

Always be ready to question your current reality and expect the unexpected. Our emotions can be overpowering when we are caught off guard. But if we go in fully expecting the possibility of an unexpected, adverse event, we can mobilize our psychological resources more quickly and fight back immediately before we become inflexible and stuck. That doesn’t mean going into a trade pessimistically expecting it to be a failure. What it does mean, however, is being ready to react.

Before the trading day begins, for example, map out all possible adverse events (such as a rate hike or a product announcement) and mentally rehearse how you’ll deal with them. You might think, “I’m not going to be caught off guard. The trade may go wrong, and when it does, I’m going to just close it out and move on.” You might also try to visually imagine losing and bowing out gracefully. Imagine yourself watching the price go in the wrong direction, and then calmly and decisively closing the position. The main idea is to be ready for anything and be ready to put an alternative plan in place. 

Trading the markets can be difficult at times. You need to be flexible and be ready to see things from different perspectives; it’s as if you have a third eye that you can use to look at things from the perspective of another person. The more flexible you are, the more you will be able to see things clearly and creatively.

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