Whether it's with crypto or the stock market , emotions frequently run amok in trading sessions and are regarded by many as detrimental to one’s performance in the field.
But that doesn’t necessarily mean that you need to be a certified sociopath in order to trade.
In fact – and paraphrasing behavioral scientist Steve Maraboli here – in both trading and life, incredible change happens when you commit to taking control of what you do have power over, rather than pursuing and craving control over the things you don't.
In order to win the mental game and overcome adversity you need to learn how to work with what you have.
Here are four easy steps on how to do just that:
1. “Self-diagnose”: knowing yourself is half the battle
As you start crafting your strategy, it is important that you don’t neglect your very nature as an individual as your risk management will correlate with it.
In fact, having the ability to analyze markets may not correlate to the having ability to profit from them.
New traders will often think that panning out a strategy and having reliable market forecasts on which direction a trade should be taken will be enough when, in fact, emotions, when unchecked, can simply run the whole thing to the ground.
There are four main pillars you should take into consideration:
Each trader has a clear, distinct identity which, in turn, will predispose them to different behaviors as well as make them prone to certain psychological influences.
Understanding the limits to your own patience and discipline are key here.
Moreover, it is no less important to access other traits such how rationality, confidence and decisiveness and figure out how susceptible are them to outside noise.
Feeling things, are we?
Emotions try to take over your actions in trading and usually come in one of two ways: chemical surges in the nervous system which trigger on specific events and moods which can both precede and outlast your trades.
Both of them can and will influence you and it is important to explore how certain things like frustration, fear, anxiety, greed, boredom and even hope and perfectionism can affect the way you move in the market in and out of trading sessions.
1.3.Your behavioral biases:
Those pesky subconscious mental shortcuts
Biases are a surefire way of negatively influence a traders logical thinking. Without going into too much detail, here are six very easily identifiable biases you absolutely should look out for:
- Anchoring bias
- Availability bias
- Confirmation bias
- Gambler’s fallacy
- Hindsight bias
- Loss aversion bias
Be it a simple rumor, a newscast or something like herding via an online community, it is absolutely vital for traders to identify any external factors which can directly influence their psychological state by pushing them outside of the boundaries of reason.
Once you have figured out where you stand as a trader, how those elements affect your strategy and what aspects need improving, it is now time to start working towards achievable goals.
2. Build your foundation accordingly
Your risk management and your trades should be determined by strategy. Period.
Having proven strategy and the ability to properly and reliably identify good set ups is as important as controlling your emotions.
Everything will follow.
As you are beginning to craft your strategy, here are three useful guidelines:
2.1.Build on your strengths
Finding success will certainly be easier if your familiar with what you are working with. If you are already good at something, chances are you can easily find your trading niche and employ whichever skills you already possess there.
2.2.Profits should not be the sole focus of your strategy, rather a direct consequence of it
In order to find yourself a consistently profitable strategy, you will need to focus on finding the right set ups and trade them accordingly. If you manage to do that successfully, profit will naturally come as a result.
2.3.Understand stop losses
Always define your stop loss before you trade and remember: if your own stop loss still lets your emotional side run wild, you are very likely to be risking more than you should.
Stop losses prevent you from losing it all but also work as barometer to your own risk management.
2.4.You are in charge, you set the pace
Do not take activity as if it is strictly correlated with accomplishment.
Do not confuse complexity for productivity.
Keep it simple.
It is perfectly reasonable to take little to no trades every week or month and still find success in what you are doing.
3. Keep learning, keep reassessing
3.1.Review your trades: learn from experience, learn from mistakes
Remember to map out what you are doing and always go back to your original plays.
Aim at being better not best.
Look for any differences or outliers from your original gameplan, focus on learning how to internalize market patterns so that in the future you may act upon these with absolute confidence.
Understand that losses are lessons so keep your focus on what needs to be improved rather the mistakes you may have made.
3.2.Read and discuss set ups
Professional traders often see themselves comparing set ups (as opposed to ideas). Set ups are measurable, replicable, are something which you can learn from and improve upon. Not random events.
4.Take care of yourself
Trading might prove to be a difficult and taxing endeavor.
As such, it is quintessential to maintain a healthy lifestyle as on the flipside you will find that detrimental habits will most certainly undermine the mental faculties that are required to be a successful trader.
“My life didn't please me, so I created my life.”
― Coco Chanel
To be at the top of your game you need to be in control.
Take the driver’s seat and always remember to have fun in trades and in life.