Finding and maintaining the proper mindset for trading

Anybody who has been trading for a while comes to the realization that trading has a lot to do with psychology. When I first started I thought trading was 50% analytical and 50% psychological. Now I think it is about 70% psychological. If you listen or read interviews with successful traders, they never say my trading was awful until I discovered that I should only trade when the RSI is above 20 or some other technical indicator. Breakthrough comes when a trader makes a mental breakthrough or discovers something about themselves psychologically that was hindering their trading. You know somebody has been trading for a while when they start to sound like Phil Jackson!

My win ratio first started to climb when I became more disciplined. It sounds easy--only trade the best setups. In practice though, sitting and watching charts for 6 and a half hours without making a single trade is difficult at first. Discipline takes energy. I find that my most impulsive trades come on Friday after I have been careful the whole week, and my discipline starts to wane. For a while I was getting in the habit of trading. I was making a trade or two per day. I always told myself, maybe I won't trade today, but it's hard to trick yourself into thinking that after you've traded 5 days in a row. If you find yourself in a trading habit, it is helpful to restore discipline by just watching the market for a day. You need to be able to watch good setups come and go for a day without any regret that you just missed out. Notice how much more clearly you see things when you aren't trading. It is easy to fall into a trading mindset, frantically searching for the next trade that is going to make you money. I try to stay in "impartial observer" mode until the last second when I need to actually pull the trigger and enter the order. What it really comes down to is clearing your mind of desire.

• From craving (attachment) springs grief,
• from craving springs fear;
• For him who is wholly free from craving, there is no grief, much less fear. (Dhammapada Sutra. In Narada Maha Thera, The Buddha and His Teachings.)

I'm not a Buddhist or anything but I find this philosophy very interesting. I'm sure you have heard that you need to control fear and greed when you are trading. Well this shows that fear can come from craving. So it follows that if you can keep your desire to make money in check, then you can restrain fear. I remember in Market Wizards, one of the traders said as soon as he started to trade with a certain material object in mind that he wanted to buy, his performance plummeted. So his craving probably resulted in fear which interfered with his objectivity. Have you ever made a trade that didn't work out and then when reviewing the setup, it looked totally different than what it looked like at the time you initiated the trade? I know I have. This is a sign of lost objectivity.

Once you find the proper mindset, you must maintain it. It is normal for human emotions to fluctuate of course. You need to find a way to get yourself relaxed and into impartial observer mode. For me this was aided by listening to relaxing music, it could be different for you. Once you find the proper mindset, I think you will discover that your trading improves greatly.