Take Control of Your Trading: How a Shift in Mindset Can Equal a Shift in Results

…in late 2010 I looked myself in the mirror and decided that I would no longer concentrate on winning and losing trades, or profits and loss statements. Rather my single focus would be on eliminating my trading mistakes. I knew that a task like this couldn’t be achieved overnight so I made it my goal of mine to end each month with at least one less mistake than the previous month…

you’re not seeing the results that you want from your trading, you have no one to blame but yourself. Okay, maybe that’s a little harsh, but I would bet that for most traders it’s true. Many make the decision to trade not just for the dreams of becoming wealthy, but because it offers a massive amount of control. Control over their finances, control over their time, control over their decision making and ultimately control over their future. All of this can be achieved in the financial markets, unfortunately, it rarely is. Excuses such as “I don’t have the time”, or “I never formally studied economics” are often used to justify the struggle. But the reason that so many traders struggle is because they lack control over their trading by lacking control over themselves. Taking control of your trading begins with understanding where you’re at in your trading journey. There are four stages that a trader will go through, three of which are briefly explained below.

Unconscious Incompetence

This is the beginning stage of trading where “you don’t know what you don’t know.” Imagine a young child exploring the world with a lot of curiosity and zero fear of the potential dangers that exist. Many traders will begin at this stage until they have the time to become more educated about the markets or learn from their own mistakes.

Conscious Incompetence

Eventually, a trader will begin to realize that being successful isn’t as easy as they once thought. Buying and selling will won’t get the job done and the quest to acquire knowledge begins. (It was at this stage when I first came across FX Trader Magazine as I was scavenging the internet for as much information as I could find).

Conscious Competence

After finding a strategy, backtesting said strategy and creating a solid trading plan, the trader now feels as if they have done everything possible to put themselves in a position to succeed. However, as their live trading begins they still notice a few minor setbacks standing in their way of consistent profitability.

The fourth stage isn’t too important because 90% of traders never make it past the third. Many will quit when trading becomes difficult and others will find themselves stuck, one step away from the prize in an endless cycle between the conscious incompetence and conscious competence stages. Being stuck in this cycle is very stressful and consumes a lot of mental energy. The trader feels as if they’ve done everything to deserve success yet every two steps forward are followed by three in the opposite direction. “Why” is the main question that is often asked, and when no answer is available blame is thrown at the market, the broker and of course the trading strategy. This leads the trader to head back to the drawing board, searching for a new method for extracting profits from the market, starting the cycle over once again.

There’s an endless number of profitable strategies that exist and if your strategy made it past initial testing, backtesting and demo trading phases, then I’m sorry to say but, it’s not the system that’s all of a sudden failing…It’s you. Believe it or not, most traders don’t have a problem finding winning trades. In 2011 a study was performed by David Rodriguez and Timothy Shea which looked at two years of data and over 12 million real trades from FXCM clients worldwide. The study showed that on average, traders were correct more than 50% of the time. So instead of shifting the blame elsewhere, the key to making a change is accepting responsibility and taking action to deal with it. Heading back to the study, if the average trader doesn’t have a problem finding winning trades, yet 90% of traders never make it past the conscious competence stage, then what’s holding traders back from success? This question was addressed in the same study and it was found that of the same sample of traders, the average profit per trade was barely half of the average loss per trade.

Knowing this data, it’s easy for one to come to the conclusion that in order to fix this problem a trader simply has to ensure that each trading opportunity provides them with a positive risk to reward ratio. However, I would assume that most traders are well aware of this, yet the problem still exists. So if not that then what? In my opinion, the problem lies, not in the analysis that takes place before the trade, but within the trader’s mind after the order is executed.

“Money is the Root of All Evil”

Many of you have heard this phrase before, and when it comes to trading this certainly holds true. Financial gains and losses are a huge trigger for our emotions. Greed, fear, pain, shame, arrogance, anger and depression are all feelings that are directly associated with the earning or loss of money. Close your eyes for a second and think about how your last losing streak made you feel. Were you angry that your hard-earned money was taken away from you? Were you scared knowing that you may end up losing more? Were you discouraged, depressed, or even in a state of panic as your account slowly bleed out and you couldn’t seem to make it stop? How about after your last winning streak, did you become greedy and start holding positions past targets in an attempt to get every last drop of profit from the market? Did you become overconfident and start taking trades that you shouldn’t have, believing that you’ve mastered trading and would never lose again? Were you scared, knowing that you’ve struggled in the past and are now wondering if this current winning streak is simply luck and not skill? These are the feelings and emotions that surround every trader each time they put money at risk.

Successful traders learn how to control these emotions, while struggling trades allow them to influence their trading decisions, resulting in the self-sabotage of their trading results. The connection between emotions and money comes from one’s core beliefs that were instilled in them from a very young age. Therefore, it would be foolish to assume that they can easily be changed overnight. Just like a bad habit, getting rid of these believes and emotions shouldn’t be the goal. Rather the focus should be on how to replace them.

Process Over Outcome

In order to make a change, a trader must shift what gives them pleasure and pain. Typically pleasure and pain are directly related to the outcome of the trade. A profitable trade provided the trader with pleasure, while a losing trader causes the trader pain. The same can be said for how “good” and “bad” trades are defined with “good” being used to describe a winning trade and “bad” being used to defined as a trade that loses. These associations are based on the outcome of the trade, something that we have zero control over no matter how great our system is. Instead of punishing or rewarding ourselves over something that is out of our hands, we need to focus on controlling what we can control and that’s the execution of the trade. A system/strategy with a positive expectancy means that the trader has an edge over the market. It’s impossible to predict the outcome of any given trade, but when trading with an edge we can be quite confident that the long term results will be in our favor. Therefore, the only job is to consistently execute the system/strategy day in and day out. For a trader with this type of mindset pleasure and pain are no longer based on the outcome of any given trader, rather they’re strictly determined by whether or not the trader has followed the correct process for executing the trade. Win or lose, a “good” trade is defined by the trader following their rules and a “bad” trade is defined by a trader making a mistake.

Eliminating Mistakes

The Japanese have a philosophy called “Kaizen” which means continuous improvement. After World War II they implemented this philosophy/management concept into many of their factories looking to take a slow and steady approach at rebuilding their economy and industry. I took this same approach with my trading and in late 2010 I looked myself in the mirror and decided that I would no longer concentrate on winning and losing trades, or profits and loss statements. Rather my single focus would be on eliminating my trading mistakes. I knew that a task like this couldn’t be achieved overnight so I made it my goal of mine to end each month with at least one less mistake than the previous month. That meant that if I made 20 trading mistakes during the month of January, then my goal for February was to make no more than 19. It was a lengthy process but as I slowly started to reduce my trading errors, my account started to grow as a direct result and more importantly so did my confidence.

Unconscious Competence

This is the final stage of trading where a trader seems to be running on autopilot. Trading has become somewhat boring and monotonous due to the fact that trader is analyzing the markets and executing the same type of trades day in and day out. The rush that comes with being up big is rarely there and the emptiness that comes with being in the red no longer has an effect. All that matters is the consistent execution of the trading plan and if you can completely control that, then you’ll have full control over your trading future.

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The Trading Coach

Trader — Trading Coach — Host of The Trading Coach Podcast — Author for Entrepreneur & FX Trader Magazine — Proud Husband & Father — Sports Nerd & Coffee Addict