The Three Parts To Trading - Part 2

Mental

For me this is the hardest part, and the most important part of becoming a successful trader. Not learning to take a loss, not obeying a stop loss, overtrading, chasing your loses. These are a few of the things that people do, myself included, when trading with poor mental discipline. When I trade with small amounts, either when I started with only a £50 bank or testing with £2 stakes, for some reason I obey my stop losses and I obey the rules of the strategy. I suspect it is because stop losses with small stakes are next to nothing in money terms, and your brain tells you, ‘that’s ok’, ‘there is nothing to worry about’. However, when you build your bank up and your stop loss equates to a £50 or £100 loss, your brain starts to panic and tries to avert that loss. It normally happens in two ways.

1.       You stay in the trade, hoping, praying that the odds will flip and go back the other way.

2.       You change your mind during the trade and go against all the preparation work you have done and the strategy you have followed and you back the other team or player for a bigger stake.

Now sometimes the odds will flip back the other way or when you switch teams or players, you will be right and win, you feel vindicated. However, it is short-lived, and you tell yourself that you will not switch next time or you will obey your stop loss next time. However, when the next time arrives, you do exactly the same, only this time instead of losing your 5% stop loss, you loss 20% of your bank, or more.

So how can we stop this from happening, how can we gain better discipline?

From what I have read, and my own personal experience, I think you have to:-

1.       Have full trust and belief in the strategy you are using, that is why it is so important that you back test a system or test a system with minimum stakes over a decent length of time. This will give you confidence and trust in the system, that in the long run, the system will be successful.

2.       We trade to make money; but I think, certainly with myself, that I put too much emphasis on making money. I think it is because I am trying to use trading to make extra cash to pay off debts, and this leads to bad habits. You almost need to forget about the money side of things and just concentrate on trading. If you have a good strategy that you trust and you follow your stop losses, the money will take care of itself. You need to try and detach yourself emotionally from the money aspect.

3.       Write down a page summary of your strategy, including stop losses, profit stops, stakes, etc. Laminate it and have on your desk or pinned up somewhere when you are trading. I have started to do this recently and found it very useful, just to keep me focused.

4.       In the past I use to put pressure on myself, setting a money profit target for the month. I don’t do this anymore. I do my preparation work and trade what games fit the criteria.

I really do think that if I crack the mental side of trading I will become a successful trader. I guess only time will tell. I hope people have found this article useful.