In my previous article, ”What Traders Can Learn From the World’s Most Successful Companies,” I suggested that there were ten factors that a trader should integrate in order to enhance his or her trading success. The process is inspired by the Six Sigma method of management – the search for excellence and consistency, day after day, trade after trade.
The Real Solution is The Trader's Mindset
This brings into focus the concept of a Trader’s Mindset. Mindset is the first component of any trading model when one prepares to become a successful trader. It all starts with one’s mindset. Mindset can be defined as “thought patterns.” How we respond to events and stimuli that we encounter each day is directly in accordance with our individual mindset. Therefore, if we can set up the appropriate mindset or thought patterns suitable for the activity at which we wish to excel, then we have a chance of producing excellence.
Everyone is different but certain emotions are hard wired into us as part of the human condition. Two of these emotions are Fear and Hope. We all take actions in the hope that they will produce a desired result. If they do, we feel elated, but if they don’t we suffer. In trading we hope to increase our equity, by entering and exiting the market in accordance with our strategy, but if we are wrong, we lose confidence and begin to feel the inevitable fear. If fear is not managed, it turns into to panic and panic leads to large losses. The only thing left for a trader to do is to pray.
By consciously building a model that will alter your mindset in such a way as to create positive feedback loops, a trader can gain in confidence and learn to manage both winning and losing trades. So what is a positive feedback loop? It is the set up, in one’s mind of a path of actions that lead to positive results. The positive results in turn lead to new positive actions and therefore, we discover that success breeds success.
To go about the process of building positive feedback loops, one needs to encompass a holistic procedure that will integrate all the components of trading, such as having the right amount of capital, a proper trading system, a suitable market and a management strategy that contains the inevitable risks. Risk is a feature of life, not only of trading. Therefore, if a trader can learn to measure risk, he can learn to manage it. Once risk is manageable, so that the trader feels as if he is in control, a positive feedback loop is in the making.
In the above chart, we see a market that turns quite abruptly. If a trader is long, without a plan of what he will do should the market turns unexpectedly, he is likely first to feel anxiety as the first bearish candle is printed, then as the price continues down, but does not stop at the anticipated support, fear becomes prominent and when the market makes a further decline, the unprepared trader is faced with panic. The losses are on paper and if there is no margin call, the trader will in all likelihood liquidate his position.
There is a saying that the more experienced trader waits for the blood to flow and then gathers up the bargains. All of this emotional roller coaster can be avoided by learning to build a trading model that is properly constructed in terms of the trader’s goals, funding ability, time and temperament.
In the next article, I will discuss setting goals as a basis for building a proper trading model, so a trader can know he can expect realistically and confidently and therefore not expose himself to abrupt and unplanned market events, which ultimately destroy his confidence and his trading account.
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