4 Mental Keys That Can Improve Trading Performance

The mental part of trading is just as important as the systems and indicators you utilize. Today, we’ll touch on some insights from an excellent book for traders, Larry Williams’ Long-Term Secrets to Short-Term Trading.

Insight #1: “Why do most traders lose most of the time? Markets can spin on a dime and most traders cannot.”

Even the best traders (or the best trading systems) are going to be frequently wrong. That doesn’t negate the trader or the system – that’s just part of trading. The challenge for traders is accepting that the trade signal was errant. In a case such as this, Williams correctly points out that we’ve been trained to ‘hang in there’ and ‘have faith in our initial insight’, even if it’s clearly the wrong course of action. That’s just our ego needing to be right so badly that it will often ignore the exit signals that warn the trader of the impending problem. His analogy may help you work through this issue. He compares trading to robbing a bank. A bank robber may successfully break into a bank and start scooping up the money, but when the lookout guy warns the man in the safe that the cops are on the way, the robber drops the money and runs. If the robber were like too many traders, he might stay in the bank and hope the warning about cops being on the way was a false warning. As Williams says, “The instant you learn to trade reality, not wishes, you will break through the wall of fire to become a successful trader.”

Insight #2: It’s not the trade, it’s the battle.

Too many traders believe that their last trade is a reflection of just how good of a trader they are (but they are the only ones who feel that way about themselves). This boils down to one word – expectation. If you expect to win all the time, or even the vast majority of the time, you’re setting yourself up for a lot of heartache. That frustration, though, is the very same force that will truly make your negative perception of yourself a reality. And even a good trade can be damaging if you let it warp your disciplined approach. The fact of the matter is that this is a game of odds, and should be played over a long period of time. Focus on the war – not the battle.

Insight #3: The amount of (or lack of) evidence for a market move does not make the move any more or any less likely.

All traders, but especially new traders, have one of two problems. They either buy too soon, or buy too late (and in reality, when it comes down to it, those are the ONLY two problems in trading). The first problem of buying too soon is a sign of not wanting to miss out of any of a move. Of course, if you jump in and the move never becomes a reality, the trade suffers. The second problem is the opposite – the trader wants to make sure the move is going to happen, so he or she will wait for all the right signals to verify that the move is for real. Of course by that time, most of the move is behind you. While it’s easier said than done, one has to find a balance between those two extremes. In this case, the best teacher is experience.

Insight # 4: What’s the difference between winning traders and losing traders?

Well, first, there are a few similarities. Both are completely consumed by the idea of trading. The winners as well as losers have committed to doing this, and have no intention of ‘going back’. This same black-and-white mentality was evident in their personal lives too. But what about the differences? Here’s what Williams observed:

The losing traders have unrealistic expectations about the kind of profits they can make, typically shooting too high. They also debate with themselves before taking a trade, and even dwell on a trade well after it’s closed out. But the one big thing Williams noticed about this group was that they paid little attention to money management (i.e. defense). And the winners? This group has an intense focus on money management, and will voluntarily exit a trade if it’s not moving – even if it’s not losing money at that time! There is also very little internal dialogue about trade selection and trade management; this group just takes action instead of suffering analysis paralysis. Finally, the winning traders focused their attention on a small niche in the market or a few techniques, rather than trying to be able to do everything. Hopefully the second description fits you a little better, but if the first one seems a little too familiar, you now at least know how to start getting past that barrier.