INSIDE THE MIND OF A PROFESSIONAL TRADER

Trading the capital markets is a business. If traders treat it as a hobby, they are likely to find that it’s easy to be unsuccessful. Professional traders understand that they need an edge and a specific mindset to successfully trade the capital markets.

When you trade, you will consistently face negative feelings associated with losing money. If you don’t embrace the idea that losing money is part of trading, these negative feelings could overwhelm you and lead to the destruction of your trading endeavour. There are several steps you should take to train your brain to embrace the mindset of a professional trader and master trading psychology.

Trading is a business — create a business plan

Before trading real capital, it’s essential to embrace the idea that trading is a business. This is one of the most important mental strategies in trading. The goal is to make money. It’s impossible to make money on every trade, so a trader’s goal should be to make more money than they lose. This can be done by winning more than they lose, or making more on winning trades than they lose on unsuccessful trades. To facilitate this, it’s important to create a trading business plan.

Determine your risk

Risk is the amount of capital that a trader is willing to lose to reach their financial goals. The reward that they receive is predicated on the risks they are willing to assume.

Your trading business plan should start with determining how much money you plan to risk when you trade. The money that you risk should be discretionary funds, which are funds that you do not need immediately for rent, food, or clothing.  Once you have allocated the amount you are planning to risk on a trading venture, you should determine how much of that money you are willing to lose, and design a risk versus reward ratio.

A very good goal is to earn three times the amount you are willing to lose. The market only pays you based on the risk you are willing to assume. So, if you believe you can win one hundred times the amount you are risking, the chance that you will win is very low.

Design a strategy

Part of your trading business plan is to design a strategy. This will incorporate the assets that you allocate to your strategy as well as the risks that you are willing to assume. You should find the most comfortable way to enter and exit the markets that provide you with the gains you are looking to achieve. A strategy could be a fundamental strategy where you look for new information to drive your trading decisions, or it could be a technical strategy that provides you with entry and exit levels. It could also be a combination of both. Creating a trading business plan is an effective mental strategy to use to cultivate positive trading psychology.

Mastering trading psychology

The professional trader understands that markets are people, and people are greedy and fearful. The best way to handle these emotions is to stick with your business plan and stay above the fray. You need to avoid irrational exuberance as well as feeling that the sky is falling.

Professional traders also understand that there is a lot of noise in the markets. Currency pairs, as well as commodities, shares and indices, will whipsaw finding the path of most pain, and making it difficult to make money. You do not want the markets to push you around and, at the same time, you need to follow your business plan without getting taken out of your position too early.

There are some sayings that ring true for the professional trader. “Cut your losses and let your profits run.”  Additionally, you never want to get married to a trade.

Don’t become married to a trade

Many novice traders fall prey to trades they fall in love with. They pick a trade they believe will be their “knight in shining armour” and once they are in, they refuse to let go. This is a recipe for disaster. All trades should conform to your strategy. You don’t want to hold on to a trade too long hoping that it will eventually come back and make you money.

Taking the emotion out of trading

Taking the emotion out of trading is easier said than done. Most novice traders second guess themselves when the market moves against them. You will experience losses when you trade, and you need to focus on your goals of winning more than losing. One way to avoid allowing your emotions to interfere with your trading is to use a systematic approach. Here you will use a system to generate trading signals, which will allow you to rely on the research you performed as opposed to a discretionary trading method.

Can an average trader become a professional trader?

With practice and dedication, an average trader can easily become a professional trader. Traders that stick to a strategy, and do not let their emotions get in the way of their ability to make money, will eventually find success.

The novice trader should initially practice on a demonstration account, where they can risk demo money instead of real capital. Additionally, once you begin to trade, your position size should initially be smaller and gradually increase.

Conclusion

The first concept toward becoming a professional trader is to understand that trading is a business. Professional traders know that you need an edge and a specific mindset to successfully trade the capital markets. It’s very important to create a trading plan and avoid allowing your emotions to interfere with your strategy.

When you trade, you will consistently face negative feelings associated with losing money. If you don’t embrace the idea that losing money is part of trading, these negative feelings could overwhelm you and lead to the destruction of your trading endeavour. An average trader can become a professional trader by running their trading as a business and removing the emotions of fear and greed from the process.

 

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This article may contain opinions and is not advice or a recommendation to buy, sell or hold any investment. No representation or warranty is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however we have put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.

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