Protect Your Mindset at All Costs
The most important (and often overlooked) concept in trading is the following: Your mindset will ultimately be the deciding factor in whether you succeed or fail as a trader.
Think of it this way: Traders do not ultimately fail due to blown up accounts – they can save their money and start a new account (as most successful professional traders have done, sometimes multiple times). Traders ultimately fail due to experiencing a fatal blow to their mindset. Once your mindset is severely damaged, it can be next to impossible to find the strength and courage to continue persevering towards your original goal of being a successful trader. It is for this reason that you must do all that you can do to minimize the possibility of experiencing a fatal blow to your mindset if you want to be a part of the minority of successful traders by proactively developing a strategy to strengthen and protect your mindset. Continue reading
This article, which examined 70M+ trades, emphasizes the importance of keeping your losers small and your winners big. The concept is simple enough, yet the vast majority of traders fail at trading because they struggle to do this effectively over time. As the article explains, most traders do the opposite: They cut their winners quickly and let their losers run, which results in a positive win rate but a negative expectancy (the negative expectancy matters a lot more – unless you like losing money with a high win rate). Note: I refer to R-Multiples a number of times in this post – if you’re not familiar with them, then read Van Tharp’s informative explanation of R-Multiples.
Possessing the ability to both 1) respect (and accept) your initial stop loss (risk) and 2) let your trades run to their targets, amidst a sea of volatility, rotations against your position, and uncertainty, requires four skills (trading virtues, really) which many traders never develop: Patience, Discipline, Confidence, and the ability to read a market Contextually. Continue reading