Mental Toughness Required by Traders

One of the Best Article I have read in recent memory!!

The mental part of the game. Its an aspect of trading that can easily be ignored, we all choose how we approach this game. Some see failures as opportunities to learn and progress, while others see them as outright failures and road blocks which should be avoided at all costs. Its all about attitude.

I feel that trading should be ‘easy’ It should be effortless and without conflict. If we are going to be in this game for 20+ years. I feel its important to make the experience as easy as we can. We shouldn’t be ‘fighting’ with the market, in the boxing ring, hoping, fearing and stressing.

There is RISK management, but SELF management is equally as important. When we are actively trading the market, we are free to make buy and sell decisions whenever we want. The tough part is consistently making the correct buy/sell decisions. These decisions come with conflict!

Taking Profits

So this is the hardest part of trading. It can be made simple if we accept a few hard facts.

1. You will never sell at the top.

2. Your going to be wrong when you sell.

This is fact. As soon as you sell, the stock will probably keep going up. You may look at it 5 months later and its up 100% since you sold it. Point is, when you sell, your probably going to be wrong. This creates a conflict.

As humans, we do not want to be wrong. We seek perfection, we want to nail the top! It can help explain why people run up stocks 20% to watch them come all the way back down to break even. The reason why they did not sell is because they are afraid to be wrong. By selling you are forced to draw a line under your mistake. But being wrong in the stock market is inevitable. 

From a practical level we can always sell half, and let the other half run. This creates a psychological win win situation. If the stock goes down, hey you locked in half.. and if it keeps going up, hey I still own half.

Taking Losses

It is amazing as humans, how we want to avoid mistakes. I do not know the exact reason. But I know that outside of trading mistakes and failures are not acceptable. Perfection is strived for. It is installed in us from an early age. In school we get rewarded for being ‘right’ we get good grades and if we are ‘wrong’ then we get bad grades, we are a dummy. Its a generally negative experience to be wrong. In the work place, if we are wrong we can be punished. If we fail we can lose our jobs etc.. you get the point.

In trading when a position goes against us. We would rather ‘give it a chance’ or wait for it to come back. We do not sell because we do not want to admit that we are wrong. It is much easier to build in failure to your trading strategy. ACTUALLY expect to be wrong. Fully accept that you will wrong be A LOT of the time. It is inevitable. 

Reacting to Losses

So we have a string of losers… we follow our strategy perfectly, take positions in good quality names  in sound consolidation patters. We have 5 positions open. One by one we get stopped out. We have a 10% draw down. How do you react to this? Do you feel mad, feel like ripping the face off your monitors? Want to make the money back!? It is at this critical moment that you have a very important choice to make.

You can get over aggressive, take on a gamble trade to try win the money back. You will most lilekly trade something not in your strategy at this point. You may also trade at the wrong time in the market. You feel mad, and have a loss. Your trading on emotion. However the market does not know you feel this way.. the market will just do what it was always going to do… most likley you will lose again. Say screw this and walk away from the machines. That is one scenario.

The second is you take a step back from the machine. You do your numbers, which are showing your batting average for this current time is down in the low 30′s. Your numbers are telling you to scale back. 2 things can be wrong here. “The market is hostile, or your selection criteria is wrong”. The exact steps to do now are almost counter intuitive. You must at this point SCALE DOWN YOUR TRADING SIZE. If you are getting stopped out of everything, the market could be at the start of a new correction. IF YOU SEE A PROMISING SET-UP. Take it with small size to test out the waters again! If you are wrong again, you are only wrong on a small position which will keep your profits intact!

The exact same approach goes for getting back into the market after a bear market/correction. The waters must be tested with small position size. Use the current volatile environment we are in right now. Would you want to be walking into 2-3% gap downs fully invested? This is how you sleep at night. Make your trading much easier. Test the waters with small positions, when those positions show you some decent gains… you can then step up the size and get more aggressive.

Your wrong a lot of the time

The big question is: Do you want to be right? Or do you want to make money? FULLY accept this part of trading. You are wrong a lot of the time. When you can fully accept this, many conflicts quickly dissolve. You no longer say, DAMN should have held it, or damn I should of sold it. You will no longer be afraid of making decisions in the stock market.

Embracing Failure 

Failure has associations of negativity. However, failures are opportunities. Generate a feedback loop about your trading. Carry out post analysis every weekend. INCORPORATE it into your trading routine. While many see failures as extreme set backs, others see them as opportunities to learn and move forward. Nicholas Darvas was the master at this. He made sure he never repeated the same mistakes over and over again.

Half the battle is being conscious of what is going on in your trading. Some people do not know they are repeating the same mistakes over and over. If you don’t know about it, how can you fix it? How can you move forward.

Learning from mistakes can be a difficult task as we are forced to take responsibility for our actions/results. It is to easy to just pretend that they didn’t happen. However this is where the secrets about your trading lie, the cause of failure and also the improvement needed to move forward. All this is revealed in our own results.

Lets take a series of 10 trades. You carry out post analysis. You find that you traded your strategy perfectly on 4 of the 10 ideas. The other 6 ideas were traded on your gut, or the ‘need for action’. You look at your results and say OK 4 of the ideas worked because I bought them at the right time, coming out of a price consolidation where my risk was in check. The other 6 ideas, we traded on human error, the need for action, or a cheat buy not in a proper set-up. What exactly has to be done here in the future?

More self control is needed to follow the strategy. No doubt there is a lot of varied combinations. Your trading results could show that you are swing trading in bear markets, Taking a series of 3-4% losses on full position sizes, therefore giving back your gains for the year.

It takes a certain degree of honesty to look at your failures, but only truly knowing where you are going wrong can you improve in the future. There is no magic to this, no one is going to do it for you.

Changing our perspective 

Fully aware that mistakes are bad, failures are bad. Not allowed, taboo or whatever. In trading they are ALLOWED. It is OK to be wrong. You are wrong when you buy, your wrong when you sell. Fully accept this.

Take the trade, monitor the position and honor you stop. Plain and simple. When it starts to work, sell half at a decent gain and let the rest go. Scale in and out of positions, at least when your wrong, its a small position. If your proven to be correct add to it. Scale out of your position at a decent multiple of your risk.

Stop worrying about getting stopped out, stop worrying about stuff going up after you sell it. Big shit people. You will never, no matter how hard you try be able to nail the top / bottom and you do not have too either. It is our EGO that wants to be in early, nail the top or nail the bottom. Our EGO wants to be right! Hold that loss, ‘give it a chance’ Dont want to sell… might keep going.. conflict after conflict! Worry and stress. Lets forget about it. Follow the strategy and sound rules and just relax!

Happy Trading People!

Remember. Do not be afraid of being wrong, failures are opportunities.

Making money is more important than being right!


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12 thoughts on “Mental Toughness Required by Traders”


  2. very helpful and informative !
    but somehow cant get over the block that it’s ‘gambling’ at the end of the day and creating wealth from buying and selling stuff which is not mine-as opposed to buying into a company, a la Buffet, is somehow not morally right. Add to this a few hefty losses from bad trades doesn’t make me a confident trader/scalper even. Fear and greed, of which i think I have an abundance, cannot be just told to take the day off while i “coldly” trade my way to the millions I dream off.
    just my musings.
    Thanks !
    I’ll be following your advice/tips regularly and report whatever i learn.

  3. DEAR SIR,

  4. this the first article i am reading. very very informative and to the point. an eye opener. thanks again. – brgds prashant.


  6. It seems, you are more psychologist than Trader…
    I am not Trader right now but I always keep reading these kind of articles by you, which are really helpful not only for Trader but for everyone.
    Really good work!!!!
    Keep it up!!

  7. Dear,,
    your gud interpretation me appreciate you ,,your nicholes darves example is very learning and decipline method gud
    thnx dear

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