Why Mind Matters Over Strategy

Trading is considered by many to be one of the most difficult professions. This is because one small mistake is enough to ruin you. Trading, like any other profession, requires commitment, knowledge, perseverance, and discipline. There is one other important parameter: capital. 

While commitment, knowledge, perseverance, and discipline lead to success in most other professions, they do not in trading. Money adds an emotional angle to trading.

A rookie trader takes trades personally. If he has a profit run, he will dream about buying a car or going on a holiday. In case of a loss, he will link it to his children’s education or his parents’ medical expenses. Such emotional extremes take a toll on decision-making, adding a layer of complexity to trading.

Most traders struggle for years searching for the holy grail of trading without realising that there is no such thing in the market. Successful traders usually have a win-to-loss ratio of about 50 percent.

A good trader with an average strategy can be more successful than a meticulous trader with a very good strategy. The difference is the winning mindset. Despite all his efforts, a trader may not see positive results because he does not have the right mindset.

Competitive sports are considered very similar to trading. It takes years of practice, commitment, sacrifice, perseverance, and discipline for a sportsperson to reach a certain level. But when it comes to winning the Olympic gold, where most competing athletes also put in similar efforts, the winner is the one with the coolest head.

Similarly, in trading, it is the coolest head that becomes a long-term, consistent trader. Such a trader does not jump strategies if they don’t work. He knows how to manage money and control the damage of a non-performing strategy.

A successful trader understands that trading is a game of large numbers. If his strategy has an edge, the occasional drawdowns will be taken care of when the market is conducive to that strategy.

Controlling emotions at drawdowns and sticking to the plan is how a trader will succeed.

Traders, especially day traders, have to think fast. For them, the strategy has to be muscle memory. If he witnesses a buy or a sell signal, he does not have the time to think. He will have to take action as the market requires.

In order to take impromptu actions, the trader needs to be composed. He cannot allow one loss or a streak of losses to affect him.

The same strategy can yield different results, depending on the trader. A losing strategy can turn profitable with proper risk management in place. While at the same time, a winning strategy in the hands of a rookie can turn into a loss because he overrides the rules by bringing in his emotions.

Conclusion

Trading is hard because it has too many invisible moving parts and most of them are in the head of the trader. He will out-think his strategy, assuming scenarios that may never happen and in the end, bring his own ruin.

To succeed in trading, one needs not only practice but more importantly the realisation that trading is a long-term game. If he is out of sync with the market, he can always take a break and come back rather than run in search of the non-existent holy grail of trading strategy.