I often get questions about my trading. And invariably, people are disappointed with my answer.
People expect to hear about complicated algorithms, mathematic formulas, deep fundamental analysis or fancy indicators.
When I explain that trading is a mental game, I can see how they lose interest in anything I say.
Let me explain.
The market is simple but trading is not easy
The market can go up, down, or sideways at any moment.
This is not complicated.
But it is oh-so-easy to make the market complicated.
And this is why even though the market is simple, trading is anything but easy.
I have found that I complicate my trading in three different ways.
1. Trying to be smarter than I am
I have set rules in my trading plan, and I know that following them will give me an edge. Period.
Still, now and then, I will question a setup for any one of several reasons.
My favourite is when I decide that the market must be overbought or oversold!?
I have too many losing trades where I have decided to fade a strong trend that surely has to turn now.
This type of behaviour is stupid and expensive.
2. Second guessing
I sometimes introduce macroeconomic reports, world news, or my opinions when making trading decisions.
This makes no sense.
- Is it likely that I know something that has not already been priced in the market?
- Do I know more than everyone else?
No, it is not very likely, and this is why I should follow my plan and stop trying to be smarter than I am.
3. Handling fear and greed
This is a big one. It is hard to master emotions.
And if you disagree, you have never had a trade with profit reverse on you and stop you out at a loss. You had made all that money and now have less than when you took the trade.
Thoughts and despair are mixed into a cocktail of toxic questions:
- Why did I not close at that level of resistance that is oh-so-obvious now in retrospect?
- Why did I not at least move the stop-loss to break even?
- Why did I not use a trailing stop loss in this particular trade?
And the questions go on.
The simple answer is that I trade according to my trading plan, which gives me an edge over time. But yes, this plan will also bring me pain now and then.
Another moment of pain is that trade that moves powerfully in my desired direction. Surely, it will move beyond my planned take profit! Enter greed. And then it reverses with strong momentum out of nowhere.
Now, I wonder if I should close and lock in a smaller profit or expect a bounce back to my take profit level.
This is now unchartered territory, as I have to make a trade decision at a level where I would not have taken the initial trade. Not a great place to be.
Finally, there is the classic: my stop loss gets hunted just moments before the market moves strongly in my desired direction. I was right, but I am left to face a loss and a missed profit.
All these scenarios and many more will wreak havoc on your mental capital, and it takes strength to brush them off and move on according to plan.
Maybe it is not humanly possible to trade completely emotionless.
I can live with the emotional rollercoaster if I am strong enough to keep to my trading plan.
I am still not 100% there, but I am close.
To sum it up
So yes, I firmly believe trading is a mental game.
You must master the skill to stay on course when everything moves against you.
If you think this is easy, you may be in for a surprise.
