Having good fundamental analysis and sound technical analysis is important in trading but it is also essential to have the right mindset to be a successful trader.
There are 10 ways to have the mindset of a successful trader:
- Keep your day job
- Avoid losses
- Admitting you are wrong
- Don’t be too greedy
- Keeping to your plan
- Patience
- Have realistic expectations
- Ability to learn from mistakes
- Flexibility
- Take calculated risks
1. Keep your day job
Statistics are not positive for day traders as 80% lose money https://www.investopedia.com/articles/active-trading/053115/average-rate-return-day-traders.asp
There is a lot of pressure on the individual to make money when trading becomes a full-time job. If you have a job then you will be less emotionally attached to your trades and you can also grow your account quicker by increasing it from the income of your day job. Once the pressure of needing to make money is alleviated, it helps eliminate emotional decisions such as taking in profits too quickly or not cutting losses soon enough.
2. Avoiding losses
There is a term called loss aversion which means that losses have a higher psychological impact than making gains. When a person loses $1,000 they feel more pain than the joy of gaining $1,000. This mindset can cause a trader to hold on to a losing trade longer. It is important to have a plan at the start at the trade and identify the amount of capital the trader is willing to lose.
3. Admitting you are wrong
Avoiding losses also means not letting your ego get in the way on a losing trade. When a trade does not go well, traders who let their ego interfere will carry losses longer than necessary. It is not worth chasing a losing trade in the hope it will go back up again because you refuse to believe you were wrong.
4. Don’t be too greedy
When traders become too greedy and strive for too much profit it can mean they end up with less. Traders should follow the signals from technical indicators and stick to their strategy. Otherwise the trade can turn against them and they can make less profit.
5. Keeping to your plan
A successful trader is disciplined with following their plan. As stated above, sticking to a plan can eliminate emotional trading if a strategy has been put in place. It can prevent getting out of trades too early due to the fear of the trade reversing.
6. Patience
The market is not always awash with trading opportunities. A successful trader needs to be patient and wait for the market to produce an entry signal or an opportunity before executing a trade. A successful trader waits for great opportunities and does not trade for the sake of it. Patience is also needed when following the trading plan.
7. Have realistic expectations
It is not realistic to believe a 100% winning ratio is possible. It is also not realistic to believe that you will always be buying at the lowest possible point and selling at the highest. It is possible to have exceptional results but these results require exceptional risk and this can take a trader many years to get to this level. Set realistic expectations and set your plan for realistic outcomes.
8. Ability to learn from mistakes
Successful traders are able to acknowledge their mistakes and learn from them. They take time to understand how these situations occurred to ensure they learn from their mistakes and take a different approach next time around.
9. Flexibility
The stock market can have periods of good and bad days. Successful traders change their strategy to adapt to the changing market environment. Or if they don’t change, then they at least wait until the market swings back to a situation that suits their own trading style. Unsuccessful traders dwell on the bad days, don’t find ways to adapt to changing market conditions, and try to trade markets that don’t suit their style.
10. Take calculated risks
Some beginner traders have a gamblers mentality by taking large positions without carefully assessing the risk involved. Successful traders carefully assess position sizing, risk management and look for specific technical indicators before executing a trade.
Lauren Hua is a private client adviser at Fairmont Equities.
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