9 Tips to Trading Without Emotion, Part 1
In this business, letting your emotions control you will lead to disaster. Instead, you need to have a powerful mindset, or what we call the Trader’s Psyche. This is a focused psychological framework that will help you develop selective, wise, and patient trading methods. The most successful traders exhibit these mental habits which help them stay focused on the long-term perspective even when the short-term seems overly distracting.
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The biggest enemy to your trading success is not the market. It’s YOU. And you are your biggest enemy because of your emotions. A profitable trading strategy is not enough on its own. You must also have the right mindset if you want to be one of the only 11.5% of traders who actually succeed.
#1 Know What to Expect
In order to develop the right mindset-to have a trader’s psyche-you need to know what to expect when day trading. You must be prepared for a variety of emotions so that you can monitor them, instead of letting them control you. Only by staying on top of your emotions can you stay focused on the key to successful day trading: maintaining a consistently profitable long-term strategy in the middle of many smaller short-term wins and losses, even when these short-term outcomes seem overly distracting.
Many traders mistakenly believe that trading will result in a consistently-rising account balance, like having an ATM in their front yard. But you already know that losses are a part of our business as traders. There will be some days and weeks when your trading exceeds your expectations, and there will be periods when your trading results are far worse than you expected. Successful traders do not fear losses, and they know that a “good” trade is one that they made based on their system, not on how much it profited them.
It’s essential that you maintain a long-term perspective. You need to place at least 40 trades before you have enough data to evaluate your strategy’s performance. Most traders only evaluate their performance once a month, trying to have as many profitable months as possible. Hedge funds evaluate their performances quarterly or yearly. If you look at your trading results daily, it will drive you crazy. That’s why I suggest that you define weekly goals, and never think of a single day as a success or failure.
The difficulty, of course, is that this strategy asks you to ignore small-term draw-downs. Sure, nobody likes experiencing losses. But when you’re trading, they are inevitable. The key is in how you deal with them. Successful traders realize that nothing is 100% foolproof, but, at the same time, they don’t rush into new trades just because they’ve experienced a few losses and want their money back quickly. Neither do they stay in a losing trade hoping that things will turn around. They set their goals and losses and stick to them.
Too many traders focus on short-term results and lose their perspective. That’s why they fail: they experience a loss or a bad week, and they start trading a different strategy. And while the trading strategy they just abandoned is recovering from the drawdown, the new trading strategy may result in yet more losses, so again, they start looking for another. Successful traders do try to adapt, but they wait until they have enough information to adapt their overall strategy, not just a few individual trades.
It’s like a dog chasing too many rabbits: at the end of the day, he’s totally exhausted and he has absolutely nothing to show for it, because he didn’t catch a single thing. Trying to react too quickly can cause you to overtrade, which will only cost you. Remember that successful traders are patient and are successful because of their systems. Trading out of panic is not trading according to a strategy that you can repeat consistently.
Day trading necessitates selective, wise, and patient trading methods. Successful day traders are practical, and do not go overboard when trading the market. They focus on the quality of each trade, not the quantity. They want to have consistent profits, not the occasional slam-dunk, and the only way to ensure that is to focus on long-term strategies for success.
#2 Develop and Stick with a System
Successful traders have a system. They stick to their system of trading religiously, even when it seems like it might not be working perfectly. You have to determine exactly what is wrong with a trading system before you can change it. If you keep altering your strategy after every trade, you have nothing consistent to revise and, more importantly, nothing to repeat consistently.
Successful traders find a successful strategy and stick to it. They know that real success means discovering two or three techniques that work dependably, and then using them over and over and over again. Successful traders do not focus on the profit or loss of an individual trade. Instead, they feel successful when they identify and perfect a technique that works repeatedly.
In the end, a successful trader is not necessarily the one who made the most money on a few big trades. That person was simply lucky. Successful traders are the ones who stick to their system. Their trading methods and indicators focus on high probability trades, sound money management, keeping their strategies free of curve-fitting, and working their system into their business plans for successful implementation. They only feel successful when they have identified an overall strategy for success that they can use to generate money time and time again. Someone who is merely lucky has no idea how to repeat their success.
The point here is not to think of yourself as successful or as failing according to individual trades. Define yourself as a trader by your system, not your bottom line. A series of losses may actually be more profitable in the long term if they teach you how to improve your system, or help you identify a particular technique that works. This is what it means to keep a long-term perspective, and the most successful traders know that the long-term is the only thing that matters in day trading.
If you can integrate these insights into your own psychological mindset, you’ll gain a significant edge in the market. I can’t stress this enough: the right mindset is one of the keys to investment success, and most traders fail to understand this.
#3 Know When to Trade (and When Not to Trade)
Successful traders know when to trade: they trade when their system tells them to. That might seem like an obvious point, but people too often forget it during the excitement of actually having money on the line.
A trader should be governed by his or her system, not by the circumstances of the moment, the market, or the outcome of a few trades. Keep a long-term perspective which focuses on developing a consistent, repeatable strategy. You won’t know what is successful or what fails if you constantly change your reasons for trading.
It is hardest to keep this kind of control when you’re experiencing losses. But this is also the most crucial time to be consistent. Otherwise, you won’t know how to avoid downturns in the future, or how to prevent them from becoming too damaging.
Losses can cause you to do one of the most destructive things a trader can do: rush into trades. Successful traders take their time while selecting trades, and they are picky about which trades to jump on. They don’t place orders in a moment of crisis to try to compensate for a loss, not do they trade just for the sake of having a position in the market every second. They act only according to their plan, even if it seems to be failing. There will be plenty of time to revise their plan when they reach their evaluation point.
At the same time, successful traders do not stay in a losing trade. They honor the stop losses that they set, and they do not hold their position in the hopes that the market will eventually “go their way.” Too often, people make bad decisions based on hope rather than on a predetermined set of acceptable losses. Know what you’re willing to lose, and then lose it if you have to. The individual trade is not what matters: it is your overall strategy. In fact, think of this loss as a gain: what can you learn from this that will prevent you from getting into the same position in the future?
If you can integrate these insights into your own psychological mindset, you’ll gain a significant edge in the market. I can’t stress this enough: the right mindset is one of the keys to investment success, and most traders fail to understand this.
In part 2 of this series, TradingMarkets contributor Markus Heitkoetter shows you how to keep your mind focused and on track when it comes to trading. Click here to read Part 2.
Markus Heitkoetter is CEO of Rockwell Trading, Inc. He has been trading for 19 years and has developed numerous trading systems along the way. He has spent the last 5 years teaching his strategies and methods to hundreds of traders worldwide, offering seminars for clients including the CME, Eurex, FxStreet, and Strategy Runner.