To Master the Market, Master Your Trading Psychology
“It is almost impossible for the beginning trader to make a reasonable assessment of the level of expertise that is required to function in a trading environment.”
— Mark Douglas, The Disciplined Trader
Quick background. I’ve been a trading coach since 2002, working with aspiring amateur and professional traders, bank and hedge fund traders and the occasional Registered Investment Advisor. You may have come across articles I’ve published in Forbes, SmartMoney and Trader Planet. I have also appeared on CNBC.
More importantly, I trade stocks and futures every day, so I understand the challenges aspiring traders face from the inside out. Most day traders lose money, but a select few can take money out of the market at will. The difference is entirely due to psychological factors.
So let’s start with a few tips.
Tip #1. Day trading appears deceptively easy in hindsight. It’s much harder on the moving right edge of the chart. You need a method that has a positive expectancy for the specific market you trade (based on backtesting), and the mental fortitude to trade it with discipline. Most traders think they have this, but don’t.
Tip #2. In day trading you will be wrong a lot. If you lack the ability to admit you are wrong in a timely manner, you will let your losers run and choke off your winners. That’s breakeven trading, or worse.
Tip #3. We all have personality ‘quirks.’ The more active you are as a trader, the more your perception of the market will be colored by these semi-neurotic biases. It’s difficult to assess and correct these sub-optimal tendencies on one’s own. We simply can’t see them objectively.
This site will help guide you toward solutions to these three trader issues, and more.
TERRIBLY EFFICIENT MARKETS
Markets are “efficient” at only one thing: separating day traders from their capital. Studies show that only the top 15% of active traders make significant money in any one year and only the top 4% of day traders are consistent performers for two years in a row.
The results form a bell curve, but it’s the losers who fill out the bell shape. Before you leave, be sure to Download my free 16-page report from the top of the sidebar detailing how the Top 4% of day traders make a living at the expense of the other 96%.
FREE YOUR MIND
Perhaps you are visiting this site because you are aware that something about your daytrading needs fixing. It is usually a combination of one’s Method and one’s Mindset, because they are inter-dependent.
A poor Method with no real edge will quickly undermine your Mindset. Similarly, a toxic Mindset will render even the very best Methods ineffective. In my daytrading coaching program, we evaluate both elements and fix where necessary.
Trading in the Zone, by Mark Douglas, is an excellent book on the psychology of trading. “The Zone” Mark refers to is a state of focused attention and self-control in which we are responsive, but not overly reactive; disciplined, but not rigid; vigilant, but not afraid. In sports psychology we call it “Flow.”
In order to find the Zone and maintain it when one is actually day trading, a trader must master three skills.
1. MANAGE STRESS
Moderate levels of stress are stimulating, which makes trading less of a job and more of an adventure. If you exceed your “stress threshold,” however, you will get into an overload state that triggers primal emotions and defensive/aggressive behaviors.
KEY POINT: In this stressed-out state of mind, you will become re-active rather than pro–active. Your prefrontal brain function will be degraded so your ability to follow your trading plan will be impaired. You will miss the obvious and lose impulse control. Read more.
Ironically, your fear of losing or missing out will actually work against you and cause losses. This leads to a downward performance spiral into day trading hell. You will seek revenge for losses or run for cover. Moreover, professional day traders take advantage of the emotional vulnerability of the average trader. Read more about toxic stress here.
2. MAINTAIN A CONFIDENT MINDSET
Aspiring day traders pay far too much attention to what just happened in the market (the Recency Bias) and not enough attention to their own mental state.
Successful day traders actively manage their mental attitude in order to maintain confidence in the face of uncertainty; discipline in the midst of randomness. Maintaining a confident mental attitude is a skill that can be learned. Top athletes practice it. Top traders practice it. You can, too.
Even successful traders, however, are at risk of psychological wounding from a string of losses or a single large loss. Read more.
In this state, a day trader will become risk averse and trade-not-to-lose. That is a recipe for breakeven trading, or worse. (Listen to a free 1 Minute Tip on rebuilding confidence.)
The good news is that there is a technology that can help clear the negative emotional residue from past losses. Click here to find out more.
3. MASTER YOUR DAY TRADING ‘EDGE’
Your trading ‘edge’ is the method (plan) that gives you an advantage in your trading beyond the odds of chance. Professionals day trade a defined plan, amateurs trade intuitively, instinctively and often impulsively.
Professional traders exploit amateurs who make trading decisions based on emotion. Read more.
If you do not carefully design and master your day trading edge to be both aggressive and defensive, your trading account will serve as a source of funds for professionals. As an active trader myself, I know what is needed to maintain an advantage in our fast-moving algorithmic markets and I specialize in helping traders sharpen their technical edge.
To review my Day Trading Coaching Program, click here.
HIGH RISK TRADERS
Some traders lack the discipline to follow a trading plan, even when they want to. These traders tend to be intelligent, creative and intuitive, but also inconsistent, disorganized and impulsive. They are High Risk Traders. Here is the true story of one High Risk Trader I worked with. Let’s call him Art.
Art was a former executive at a well-known software company. He was smart, creative, confident, strong-willed, ambitious, hard-working and very dedicated. Nevertheless, despite his CEO-like personality, Art took his trading account from $1 million down to $100k in the year before he called me. How did this happen? Read more.
Clinical studies support the popular belief that men have difficulty asking for directions (I’m not kidding… we do have a stubborn streak.) Art was like that. As his strategies and tactics failed to achieve the desired results, Art never sought help. He remained entirely focused on the market, not on himself or his system. To recoup losses, he traded more frequently and averaged down on losing positions. He tried harder, not smarter.
His wife was worried about his trading, but Art always felt he was ‘on the verge of greatness’, even as his equity curve continued to plunge. Ironically, his self-confidence (masking his huge need to be right) actually worked against him. You are probably not as stubborn as Art, but your own psychology is certainly a key factor in your bottomline.
RISK OF RUIN
The Risk of Ruin defines the odds of reaching a point at which you are no longer mentally, emotionally or financially able to fund (or re-fund) your account. The risk increases exponentially for those day traders who:
- Enter too high for longs and too low for shorts;
- Can’t stay in a winning trade;
- Can’t take a loss in stride and keep losses small;
- Overtrade and “revenge” trade;
- Compulsively trade against the trend, and/or
- Can’t seem to learn from their mistakes.
These behaviors are warning signs that you are vulnerable. You can find out more by taking my Free Daytrader Risk Profile here. The Risk Profile will help you determine whether you have some of the psychological risk factors that can lead down this path. It is free of charge.
TO MASTER THE MARKET, MASTER YOURSELF
Whatever your level of intelligence, education or success in life, learning to day trade for a living is likely to be the most difficult challenge you have ever faced.
Your business skills may not help you because the daytrading environment is completely different than the business environment. Moreover, you are likely to encounter certain things about yourself that you were not prepared to face before.
I’m a competitive tennis player. In his autobiography, Andre Agassi wrote, “For me, tennis is a vehicle to discover myself and push myself.” For many traders, trading serves the same purpose. (It does for me.) You may be driven to master trading because it holds the secret not only to your financial future, but to your own self-mastery.
Many of my coaching clients report that as their daytrading improves, the quality of their life improves along with it. If you are this type of aspiring trader, passionate about succeeding, I can coach you to achieve your goals.
YOUR DAY TRADING COACH
I have a Ph.D., but I’m not an “academic.” I daytrade everyday for my own account and I help people free themselves from the various traps that we all fall into when we put our hard-earned capital at risk.
I know the issues from the inside as well as the solutions. Chances are I have been where you are and I can help you move forward.
Whether you are an aspiring rookie, an experienced veteran who is stuck at break-even, or a successful professional daytrader looking to sharpen your edge, let me help you reach your full trading potential.
Review my 12-Week Trading Psychology Coaching Program.