Step 6: Check your mindset
(A) Know who you are: When you trade in the markets, your first priority is to look at yourself and write down your own personality traits. Examine your strengths and weaknesses and then ask yourself how you might react when you seize an opportunity, or how you might react when your position is threatened. This is also known as a personal SWOT analysis. But don’t lie to yourself. If you’re not sure how you would behave, ask someone who knows you well for their opinion. (For more information, see Does Your Personality Match Your Trading Methods?)
(B) Customize your personality to your trading methods: Make sure you are satisfied with the type of trading conditions you will experience in different periods of time. For example, if you’ve found that you’re not the kind of person who likes to go to sleep with open positions in a market where trading is done in your sleep, then you might want to consider day trading so you can close your positions before you go home. However, you must then be the kind of person who likes the adrenaline rush to constantly monitor the computer throughout the day. Do you like to be tied to the computer? Are you an addictive or compulsive person? Do you go crazy if you pay attention to your positions, and are you afraid to go to the toilet if you miss a tick? If you’re not sure, go back and check your personality again to be sure. If your trading style doesn’t suit your personality, you won’t enjoy what you do, and you’ll quickly lose your passion for acting. (For more information, see Day Trading: An Introduction).
(C) Be prepared: Plan your trade so you can implement your plan. Preparation is the mental dry exercise of your potential trades – a kind of dress rehearsal. By planning your trade-in advance, you set both the basic rules and your limits. If you know what you’re looking for and how you want to behave when the market does what you expect, you can be objective and stay out of the cycle of fear and greed.
(D) Be objective: don’t get emotionally drawn into your trade. It doesn’t matter if you’re wrong or wrong. What matters, as George Soros says, is that “you make more money if you are right than you lose if you are wrong”. Acting is not about the ego, although it can be worrying for most of us if we plan a trade, apply all our logic and then find that the market does not agree. It’s about training yourself, accepting that not every trade can be a win and that you have to accept small losses with decency and move on to the next trade.
(E) Be disciplined: this means that you need to know when to buy and when to sell. Base your decisions on your pre-planned strategy and stick to them. Sometimes you’ll get out of a position just to find that it would have been reversing and profitable if you had stuck to it. But this is the basis of a very bad habit. Don’t ignore your stop losses – you can return to a position at any time. You will find it more reassuring to eliminate and accept a small loss than to wish that your big loss will be recouped when the market recovers. This would be more like trading with your ego than trading on the market.
(F) Be patient: when it comes to trade, patience is really a virtue. Learn to sit on your hands until the market gets to the point where you’ve pulled your border in the sand. If it doesn’t get to your entry point, what have you lost? There will always be an opportunity to make a profit on another day. (For tips on patient investing, see Patience is a trader’s virtue).
(G) have realistic expectations: This means that you don’t lose sight of reality and miraculously expect to turn 1,000 dollars into 1 million 10 trades. What is a realistic expectation? Consider what some of the best fund managers in the world can achieve – maybe 20-50% a year. Most of them achieve much less than that and are well paid for it. Go into trading and expect a realistic return on a constant basis; if you manage to achieve a growth rate of 20% or better each year, you will be able to outperform many of the professional fund managers. (For more information, see Measure Portfolio Performance by Measuring Returns).
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