Why 90% of the Mental Game is Your Trading

By | October 16, 2014

90% of the mental game being trading well;

So here are three trading practices that reliably lead to emotional disruption:

1)  Poor risk management – Oversized positions; holding positions that are more correlated than you realize; failing to clearly define and trade a risk/reward relationship for each trade–all of these create outsized losses, which in turn generate outsized emotional responses and subsequent potential for disruption of trading.

2)  Failure to plan – Trading without an explicit process for clearly formulating an opportunity set; trading ideas and patterns that are untested and unproven:  these generate loss and frustration, which then color thought and action going forward.

3)  Failure to adapt – Markets become more volatile but trading sizes don’t change; the trade becomes choppier but trading continues to pursue momentum:  doing the same thing when the environment changes is a sure way to become confused, then frustrated, then reactive.

Show me traders troubled by emotion and nine times out of ten I’ll show you traders who are taking improper risk, who are underprepared, and/or who have been trading static methods in dynamic markets.  What those traders need is not counseling, coaching, or therapy.  What they need is to trade more intelligently.  If a chess player takes imprudent and uninformed risks early in a game, does not prepare for an opponent, or plays the same way regardless of the opponent’s strategy, we would not attribute his or her losses to a failure of any “mental game.”

True, psychological variables become relevant once skills are honed.  Then mindset can help deploy them consistently.  But no amount of focus on the mental game can substitute for skill and preparation and the need for strategies that possess an objective edge in the marketplace.  Trading randomness with a positive attitude will make one a good loser, not a high performing winner.

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