“I haven’t seen much correlation between good trading and intelligence. Some outstanding traders are quite intelligent, but a few aren’t. Many outstanding intelligent people are horrible traders. Average intelligence is enough. Beyond that, emotional makeup is more important.” – Mark Douglas.
The above paragraph is from the book ‘TRADING IN THE ZONE’ by Mark Douglas. Many people must have heard about this book, few might have read it and it is highly recommended as well. When people get acquainted for the first time with stock market, they get fascinated by it’s potential to make big money and starts reading materials on technical analysis, which you should. And as any other businesses, this business also needs a decent understanding, perhaps more than any other business. Why? Let me tell you.
Trading does not just consist of buy low and sell high. It also isn’t about charts, chart patterns and indicators only. There is one crucial aspect of trading that gets ignored by majority of people who want to make there way in markets and that’s called PSYCHOLOGY. In trading, psychology or as you can call it ‘mindset’ plays an important role more than any strategy. Because you may have the world’s best strategy with more than 90%-win ratio and still you won’t be successful if you don’t have the right mindset or psychology. Where a sane trader with great psychology will make a killing in market with a strategy that hasn’t even have 50%-win ratio.
HOW DO WINNERS THINK DIFFERENT FROM LOSERS?
Observe the above image & see if you can relate yourself with it. It’s the cycle from which 95% traders pass in their initial phase. Focus on the word OPTIMISM. Optimism is one of the emotions and the reasons responsible for traders’ self-destruction. Optimism means if you are in a losing trade, and instead of putting stop loss or booking loss, you keep averaging at lower levels in hopes that eventually it turns in your direction. But in that process, you keep forgetting that you are damaging your capital which is the only vehicle that will take you to your goal.
This is the point where professional traders have edge over novice traders. Not the strategy, not the money but only PSYCHOLOGY. They know how to keep losses small, and when to cut them in right time.
“THE ONLY THING TO DO WHEN A PERSON IS WRONG IS TO BE RIGHT, BY CEASING TO BE RIGHT. CUT YOUR LOSSES WITHOUT HESITATION.” – JESSE LIVERMORE.
Professional traders insist on having a great trading psychology over any great strategy. They don’t go with the flow and take every other trade that comes on their radar. They know when to trade, when not to trade & how to cut losses quickly.
They follow risk management very strictly and that’s the holy grail of stock market.