Trading stocks is hard and there are times where you just want to pull out all your hair! I know that feeling (which explains some of the hair-loss issues) because it comes from that notion that nothing can go right and it seems like Mr. Market has singled you out to humiliate and destroy you. I have been there! I have now traded for 25 years, which accounts for a majority of my life and there have been so many times where I have been frustrated by trading and even anguished. All the while, the art of successful trading, or the psychology of trading, per se, dictates that only the most mentally sound individuals can handle trading in the stock market.
I have learned, over the years, to control my emotions and what I want to do here is to show you some easy-to-implement lessons and tactics that you can implement into your trading, as well as provide you with a free spreadsheet below that will better help with controlling those emotions.
At times the stock market may leave you feeling like your:
- Losing trades are too much to handle
- Closing out profitable trades are always done in fear
- Trading because you are scared of missing out on a big move
- Breaking equipment (or furniture) out of anger and rage
The stock market will tax you mentally like no other profession can. But you see, it doesn’t have to be that way. Throughout my trading career there have been days where, even after the market closes, its influence still lingers strong. But I have learned how to keep the stress to a minimum because if you don't, then no sum of money or profits is worth what you put yourself through. So, in order to keep the stress of trading to a minimum, I have compiled a list of trading tips that allows for me to be mentally and psychologically strong in my trading endeavors.
Mental Toughness + Trading Psychology
So what can we do as traders to be more sound in our approach to trading so that we are not sabotaging our pursuit at profitability? Below I have five trading tips that I am confident will make you better equipped for handling the pressures of trading.
Some of these are extremely simple, while others require some practice and repetition. But in the end, I am confident that you will be a better trader because of them.
Trading Psychology Tip #1: Don’t Break Your equipment
Let’s just get this one out of the way. Breaking your equipment won’t make a single trade turn out better for you. Getting mad and throwing your mouse, or breaking your keyboard (guilty of both) won’t improve your circumstances for you one bit.
Even if you smash your keyboard over your trading desk and it doesn’t break, good luck in finding all the keys that are now scattered across the room (imagine dropping a bag of glitter - they go everywhere!). Besides, who really wants to take time out of their trading day and potentially miss out on better trades in the future, because you had to take the time to go to Best Buy to get your fourth keyboard in the last three months.
And if you find that no matter how hard you are trying, you are still taking it out on your keyboard or mouse, then consider going away from wireless devices and buy the ones that are hard-wired into your computer instead. At least you’ll reconsider whether it is a good idea to just rip equipment out that is plugged into your computer.
Anger and trading is a bad combination and it doesn’t just apply to computer equipment - it can be the walls in your house that you find it convenient to put a hole in. In the grander scheme of things, if you can control your anger when it comes to trading, it will trickle into other parts of your life where you will find yourself to be a much cooler, calmer and collective - particularly in those high-stress situations.
So get it together, don’t let a trade or a string of bad trades cause you to do something you’ll regret instantly afterwards.
Trading Psychology Tip #2: Don’t Dollar Watch
This has to be one of the worse habits among traders.
Not only is it a bad habit, but it is incredibly lazy!
When you are watching the dollar value of your trades and how profitable they are (or un-profitable for that matter) you aren’t trading, you are just playing slots at a casino. Watching the dollar value of your trade is not trading. It is not savvy and it will cause your emotions to get the better of you, which will lead you back to breaking trading tip #1.
We personalize our money. It is much easier to keep the emotions out of the trade if you eliminate the need to look at the dollar value associated with the profit/loss of a trade.
That’s because when you look at a stock and you see that it is down $100, you say to yourself,
“I could’ve paid the water bill with that money!”
“That $400 could have bought me a new cell phone.”
“That grand I lost on the trade would have paid this month’s mortgage.”
When you start thinking like that, and it is easy to do, you are personalizing the trade and are no longer focusing on the trade itself but the effects of the trade.
...And that will lead you to making an emotional decision.
So use the privacy settings that most of the brokerages now provide you with and star-out the dollar value of your profits/losses that you find yourself staring at and instead go back to the chart and your pre-established stop-loss.
Trading Psychology Tip #3. Don’t track your performance for the day, week or the month
Whether you should make another trade or refrain from making another trade should not hinge on whether you are up or down on the month or by how much. You shouldn’t take on more risk, simply because you are playing with the House’s money or feel the need to trade more, just to make up for the losses so far on the week.
Instead, you should be trading because the market conditions and the trade opportunities at hand are aligning themselves to provide you with a great trading opportunity.
How good or how bad you are doing on the day, week, or month should not dictate how or when you should be trading.
Trading Psychology Tip #4: Use the same amount on every trade
Not everyone is going to agree with me on this one, and that is okay, but if you are struggling with the mental side of trading, one thing that you can do to make it easier for you is to treat all trades the same. I do this, because I don’t want my attention to be diverted solely to one particular trade simply because I have a higher allocation of capital dedicated to it.
Instead, I put 10% of my capital on each of my trades. Never more and never less. It is something I don’t have to think about or consider because I know that when I trade it is worth 10% of my capital to be allocated to that trade.
It is the same all the time!
This will also keep you from doubling down on a trade or being overly confident on its prospects. Instead, you’ll see it as just another trade.
Besides, the worse thing that you could do is be over zealous of a trading opportunity, put 50% of your capital towards it and then find out that the trade dropped 10% in value and just wiped out the other 5 trades at 10% portfolio allocation that gave you 10% in gains.
You can also do this by using the free worksheet I made in Excel by clicking on the image below. It’ll allow you to keep the dollar watching out of the trade, while also easily determining how many shares you should be buying each time you place a trade. So go ahead, and download it!
Trading Psychology Tip #5: Go for a Walk
I do this all the time, I have to!
I would lose my mind if I didn’t. I take a walk around the block and it will usually allow me to clear my head and think things through in terms of strategy and what is in the best interest of my trading and the positions that I currently have. If you can, leave your cell phone at your home or office, rely on the pre-set stop-losses, and walk distraction free - otherwise you might find your walk is just an outdoor excursion of you staring down at your cellphone the whole time.
You’ll be amazed of what comes to mind when you step away from the charts for a few minutes. You’ll also stimulate the brain some with exercise, which we can all agree, we probably can afford to do more of.
Oh, and it might just save the life of a keyboard or mouse!
Let’s wrap up these trading tips!
There is a lot to speak of when it comes to trading psychology, but what I wanted to do here is not spend so much time on the theoretical aspects of it, but to focus in on the application side that will allow you to instantly become a better trader.
By applying these trading tips to your daily routine, you are going to find your are making much better decisions and are of sound judgement when it comes to determining what trades are in your best interest or whether you should hold on to that trade one more day.
Simply put, trading is filled with anxiety and emotion and the more of it you can eliminate from your thought process, the better off you will be. So focusing in on the trigger points that cause you to fly off the handle and the tactics you can employ to counter them, thereby keeping regret from being a central component of your trading life, will no doubt, make you a better trader.
So tell me in the comments section below, what are some of the strategies you use to keep yourself mentally tough and sound of mind?