Most people find trading to be a demanding activity. It’s not surprising as trading presents unique challenges. Overcoming these hurdles requires us to go against many preconceptions that we have. Hence, to gain the resilience you need to stay in the game for the long run, mindset shifts are critical.
Many traders learn it the hard way. They trade and fail. They persist. Then, finally, they get the epiphanies that help them punch through their performance ceiling.
Here, let’s talk about three critical epiphanies that resilient traders have.
#1: Trading more does not mean making more money.
The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.
Most jobs pay you by the hour or need you to be present for a minimum period. Working overtime pays more. Taking on more projects means higher income.
Hence, it’s natural to assume that trading more means earning more.
Trade More = Earn More
As a trader, you are rewarded by the quality of trades you take. You are not paid by the number of trades you take or the time you spend trading.
Most traders are still anchored by the conventional idea of “more is better”. This phenomenon explains why overtrading is extremely common.
Once you realize this fact about being a trader, you will:
- Appreciate the value of patience
- Restrict yourself to taking the best trades
- Stop trading when you are not focussing well
In a nutshell, you become a more resilient trader.
#2: Losing a trade does not mean you are a terrible trader.
Doesn’t feel good when you get a losing trade?
And because it does not feel good, you start to adjust your behavior when you encounter losses. You want to avoid losses, and you think of losing trades as a bad thing.
So you start to avoid all losses at any costs. This goal will launch you into a wild goose chase for the Holy Grail.
To avoid this unhelpful spiral, understand this.
There’s no trading strategy with a 100% win rate.
Hence, by definition, trading involves losing. Losing is an essential part of trading for a living.
Trading is about losing correctly.
You want to lose. Provided that you are losing as part of a method that generates profits over time.
It means that losing trades do not make you a bad trader. It’s how you lose.
Let’s look at a business analogy. You would not worry about your cost of goods if you are confident that you can sell them for a profit. (Cost of goods being your losing trades here.)
If you fixate on reducing your cost of goods to zero, there is only one outcome. Your business stops.
Hence, the only way to avoid losing trades is not to trade at all. Accept trading and accept losing.
#3: Planning for losses is more important than planning how to win.
New traders start by constructing a trading plan to win. It grabs their entire focus. And it’s really hard to convince them otherwise.
But at some point, their trading account goes bust. Then, they look back and realize that they failed because they did not plan how to lose.
Planning how to lose is the key to longevity in the market.
Planning for losses is not as simple as setting a stop-loss.
Planning for losses means:
- Limiting your position exposure.
- Understanding the drawbacks of risk management approaches (E.g., stop-losses are not guaranteed.)
- Having an action plan to stop trading when losses are affecting your psychology.
- Knowing when mounting losses reflects a flaw in your trading strategy.
- Limiting the impact of your losses on your financial health. (Beyond your trading account.)
This list is not exhaustive. But they give you a sense of what to focus on when you design your trading plan. Think of all the ways you could lose, and plan what to do in each scenario.
When you lose, you have two options. You lose in a calm and controlled manner. Or you lose your shit.
The choice is clear, so plan for it.
Now you are ready for long-term success in the market. No. Not so fast.
This article sets the stage for you to do some essential pondering.
But epiphanies are not read. They are what you get when an idea suddenly clicks in your mind, and you internalize a new viewpoint.
You’ll know it when it comes.