Developing a Trading Mentality

Much has been written about what type of personality it takes to be a successful trader. What makes this question particularly difficult is that there is no definitive answer about the characteristics a trader should have to be successful. If you assess your personal traits honestly and realistically, you can probably develop a trading program that fits your personality more easily than you can adapt your personality to a particular trading program.

But what provides a common thread among many successful traders is that they all have a trading mentality. That doesn’t mean just shifting from the traditional buy-and-hold mindset of the past to jumping into and out of positions readily, however. That is part of it, but a trading mentality includes several other factors related to attitude that may be somewhat different from what you have heard and believed in the past.

Speculation is okay.
You may have heard complaints about how speculators are to blame for all kinds of price distortions and how they manipulate prices, even when they are responding to perceptions of supply and demand. None of today’s economic developments or technological advances would have been possible without speculation. No one would have started a company without speculation. Speculation is simply a part of growth.

“Speculating” is not the same as “gambling.” Speculating can turn into a crapshoot, but successful speculating means two things: You always limit your risk, and you always try to have favorable probabilities.

Gambling creates risk. A bet in a casino or at a racetrack creates a risk to your money that did not exist before.

In trading (speculating), the risk already exists. Someone is carrying that risk, and a trader/speculator is willing to assume the risk that someone else wants to pass along because they do not want it. Trading is all about transferring risk from those who want to insulate themselves from adverse price moves to those who are willing to take on the risk in exchange for the possibility of profiting from a price move that would be favorable to them.

Speculators play a vital role in this process by always being available to take the other side of these trades and providing liquidity to the marketplace to make prices flow efficiently. Without speculators, prices for many stocks and products would be much more erratic and uncertain and potentially much more detrimental to the development of a sound economy. Trading allows both producers/consumers and speculators and to achieve their goals. As a trader, you are “speculating” on what will happen, not “gambling.”

Losing is okay.
Nobody likes a “loser,” especially if it means money, but in trading you can be a winner by liking to take losses. You expect all of your trades to work or you wouldn’t have taken them. But because of the uncertainties of the marketplace, the reality is that many successful traders have built outstanding track records with only 40% or fewer winning trades.

One of the most important market adages is, “Cut your losses short.” When the market tells you that you are wrong, get out of your losing position quickly so the loss doesn’t grow and wipe out your trading stake, the key to staying in the trading game. If your analysis was wrong, the sooner you find out, the better off you usually are.

The market is not ‘against’ you.
You may not believe this when the market seems to be gunning for your stops or reaching a certain price level just to take your money. The market does try to confuse most participants most of the time, but don’t take it personally if you are the victim of an adverse price move. The market is not out to “get” you but is just flowing along, and your position just happens to be carried along with it. 

It’s okay to sell what you don’t own.
Many newcomers to trading have a difficult time comprehending this fact. That’s understandable if your experience has been limited to buying stocks, but with trading instruments such as futures or options, it is as easy to sell as it is to buy. In fact, selling means no difference in the amount of money required or in the trading procedure other than saying “Sell” instead of “Buy.” So you can “Sell high, buy low,” even if you have never bought the instrument in the first place.

It’s okay to be a ‘bear.’
Generally, a market that is going up or is “bullish” is perceived as “good,” and  a market that is going down or is “bearish” is called “bad.” But, as the previous item about going short suggests, being a bear and watching prices decline may be a good thing for your account. In reality, you should always have a two-sided view, neither bullish nor bearish but reacting to what you see the market doing. When you see an opportunity arise, being a bear or shorting the market works no differently than being long or bullish.

It’s okay to be emotional about trading.
Most advice about trading suggests taking the emotion out of trading, and it is true that you should not let emotions rule your trading decisions. But if you want to be a successful trader, you have to have a passion for trading – a passion that will push you to learn about the markets and trading, force you to study price action to become a well-versed expert in whatever method you choose and give you the desire to stick with trading when things may not be going so well. Passion drives people in many successful endeavors, and trading is no exception.

1. Knowing What You Don’t Know
2. Why Do You Want to Trade?
3. What Are Your Resources?
4. Developing a Trading Mentality
5. The Language of Trading

Main Trading Resources Section