Nine Tips for Trading Without Emotion

In this business, letting your emotions control you will lead to disaster. Instead, you need to have a powerful mindset, or what we call the Trader's Psyche. This is a focused psychological framework that will help you develop selective, wise, and patient trading methods. The most successful traders exhibit these mental habits which help them stay focused on the long-term perspective even when the short-term seems overly distracting.

The biggest enemy to your trading success is not the market. It's YOU. And you are your biggest enemy because of your emotions. A profitable trading strategy is not enough on its own. You must also have the right mindset if you want to be one of the only 11.5% of traders who actually succeed.

#1 Know What to Expect

• In order to develop the right mindset-to have a trader's psyche-you need to know what to expect when day trading. You must be prepared for a variety of emotions so that you can monitor them, instead of letting them control you. Only by staying on top of your emotions can you stay focused on the key to successful day trading: maintaining a consistently profitable long-term strategy in the middle of many smaller short-term wins and losses, even when these short-term outcomes seem overly distracting.
• Many traders mistakenly believe that trading will result in a consistently-rising account balance, like having an ATM in their front yard. But you already know that losses are a part of our business as traders. There will be some days and weeks when your trading exceeds your expectations, and there will be periods when your trading results are far worse than you expected. Successful traders do not fear losses, and they know that a "good" trade is one that they made based on their system, not on how much it profited them.
• It's essential that you maintain a long-term perspective. You need to place at least 40 trades before you have enough data to evaluate your strategy's performance. Most traders only evaluate their performance once a month, trying to have as many profitable months as possible. Hedge funds evaluate their performances quarterly or yearly. If you look at your trading results daily, it will drive you crazy. That's why I suggest that you define weekly goals, and never think of a single day as a success or failure.
• The difficulty, of course, is that this strategy asks you to ignore small-term draw-downs. Sure, nobody likes experiencing losses. But when you're trading, they are inevitable. The key is in how you deal with them. Successful traders realize that nothing is 100% foolproof, but, at the same time, they don't rush into new trades just because they've experienced a few losses and want their money back quickly. Neither do they stay in a losing trade hoping that things will turn around. They set their goals and losses and stick to them.
• Too many traders focus on short-term results and lose their per¬spective. That's why they fail: they experience a loss or a bad week, and they start trading a different strategy. And while the trading strategy they just abandoned is recovering from the drawdown, the new trading strategy may result in yet more losses, so again, they start looking for another. Successful traders do try to adapt, but they wait until they have enough information to adapt their overall strategy, not just a few individual trades.
• It's like a dog chasing too many rabbits: at the end of the day, he's totally exhausted and he has absolutely nothing to show for it, because he didn't catch a single thing. Trying to react too quickly can cause you to overtrade, which will only cost you. Remember that successful traders are patient and are successful because of their systems. Trading out of panic is not trading according to a strategy that you can repeat consistently.
• Day trading necessitates selective, wise, and patient trading methods. Successful day traders are practical, and do not go overboard when trad¬ing the market. They focus on the quality of each trade, not the quantity. They want to have consistent profits, not the occasional slam-dunk, and the only way to ensure that is to focus on long-term strategies for success.

#2 Develop and Stick with a System

• Successful traders have a system. They stick to their system of trading religiously, even when it seems like it might not be working perfectly. You have to determine exactly what is wrong with a trading system before you can change it. If you keep altering your strategy after every trade, you have nothing consistent to revise and, more importantly, nothing to repeat consistently.
• Successful traders find a successful strategy and stick to it. They know that real success means discovering two or three techniques that work dependably, and then using them over and over and over again. Successful traders do not focus on the profit or loss of an individual trade. Instead, they feel successful when they identify and perfect a technique that works repeatedly.
• In the end, a successful trader is not necessarily the one who made the most money on a few big trades. That person was simply lucky. Successful traders are the ones who stick to their system. Their trading methods and indicators focus on high probability trades, sound money management, keeping their strategies free of curve-fitting, and working their system into their business plans for successful implementation. They only feel successful when they have identified an overall strategy for success that they can use to generate money time and time again. Someone who is merely lucky has no idea how to repeat their success.
• The point here is not to think of yourself as successful or as failing according to individual trades. Define yourself as a trader by your system, not your bottom line. A series of losses may actually be more profitable in the long term if they teach you how to improve your system, or help you identify a particular technique that works. This is what it means to keep a long-term perspective, and the most successful traders know that the long-term is the only thing that matters in day trading.
• If you can integrate these insights into your own psychological mindset, you'll gain a significant edge in the market. I can't stress this enough: the right mindset is one of the keys to investment success, and most traders fail to understand this.

#3 Know When to Trade (and When Not to Trade)

• Successful traders know when to trade: they trade when their system tells them to. That might seem like an obvious point, but people too often forget it during the excitement of actually having money on the line.
• A trader should be governed by his or her system, not by the circumstances of the moment, the market, or the outcome of a few trades. Keep a long-term perspective which focuses on developing a consistent, repeatable strategy. You won't know what is successful or what fails if you constantly change your reasons for trading.
• It is hardest to keep this kind of control when you're experiencing losses. But this is also the most crucial time to be consistent. Otherwise, you won't know how to avoid downturns in the future, or how to prevent them from becoming too damaging.
• Losses can cause you to do one of the most destructive things a trader can do: rush into trades. Successful traders take their time while selecting trades, and they are picky about which trades to jump on. They don't place orders in a moment of crisis to try to compensate for a loss, not do they trade just for the sake of having a position in the market every second. They act only according to their plan, even if it seems to be failing. There will be plenty of time to revise their plan when they reach their evaluation point.
• At the same time, successful traders do not stay in a losing trade. They honor the stop losses that they set, and they do not hold their position in the hopes that the market will eventually "go their way." Too often, people make bad decisions based on hope rather than on a predetermined set of acceptable losses. Know what you're willing to lose, and then lose it if you have to. The individual trade is not what matters: it is your overall strategy. In fact, think of this loss as a gain: what can you learn from this that will prevent you from getting into the same position in the future?
• If you can integrate these insights into your own psychological mindset, you'll gain a significant edge in the market. I can't stress this enough: the right mindset is one of the keys to investment success, and most traders fail to understand this.

#4 Be Patient

• Successful traders have patience. They know that most positions will not be profitable the minute they are opened. It takes time for a market to increase, or to move at all. You should never expect a position to jump right before your eyes.
• Besides, remember that focusing on a particular trade is not your main goal. If you are serious about establishing a long-term strategy for consistent success, any one trade is only a small part of an overall plan. It's the plan that you want to be successful. Of course it's nice when each trade goes well, but if it's not because of your system, you haven't learned anything you can repeat in the future.
• Also keep in mind that successful traders do not overtrade. They realize that doing so puts their account at risk, and they know that not every day is a day for trading. They wait for high probability opportunities. Expecting too much out of any one trade, or even out of any one day, can cause you to overtrade. You may find yourself wanting to see immediate success, and when you take more trades, it at least makes you feel more active. But if you aren't acting according to the strategies you devised for yourself in your planning sessions, you are destroying all the work you've done. Even if the extra trades are profitable, you haven't really learned anything that can contribute to a consistently successful trading career. You've only gotten lucky.
• Wait for situations that meet your criteria. See yourself as carrying out a program, not as grabbing for any little profit you can at the moment. Remember that no one trade is as important as establishing a trend of success across your entire portfolio. And creating that trend will take time and patience.
• If you can integrate these insights into your own psychological mindset, you'll gain a significant edge in the market. I can't stress this enough: the right mindset is one of the keys to investment success, and most traders fail to understand this.

#5 Adapt to Current Market Conditions

• Successful traders realize that nothing is 100% foolproof. They trust in their indicators, but they are aware of other factors that may influence their trades. Consequently, they stay open to new ideas, to other people's experiences, and to experimentation.
• Since your goal as a trader is to constantly revise your strategy to be more consistently profitable, you must always think of your plan as a work in progress. Every win and every loss gives you more data to revise your techniques. But you should never think of yourself as having found the one and only way to trade. Instead, consider yourself as building a toolbox with different tools for different situations. Not every tool will work every time, and you may have to find new tools for new developments in the market. You should never depend too heavily on any one technique.
• Successful traders have the ability to adapt. They adjust their trading methods and decisions to account for changing market conditions. This is so important. Becoming a successful trader requires that you understand how to react when the market fluctuates, which it will. After all, you only make money when there is an upward or downward trend.
• Change in the market is necessary to your success. Many traders fail when they refuse to try new strategies for fear of losing money. They get stuck with a very small toolbox and, if they are unwilling to change, they will soon find that their methods for generating profit no longer fit the market's recent habits. Part of the problem here is fear of risk. But those afraid of risk should not be trading in the first place.
• Successful traders look at new risks as opportunities to learn how a certain strategy works. In the worst case, they know not to try that technique again, but in the best case, they increase their ability to react to market changes. Whether the individual trade is a profit or loss, the trader has learned something valuable.
• If you can integrate these insights into your own psychological mindset, you'll gain a significant edge in the market. I can't stress this enough: the right mindset is one of the keys to investment success, and most traders fail to understand this.

#6 Focus on Being Consistent

• Successful traders know that success means consistency, more than it means immediate profits. Of course traders want to make money, but to do that consistently, you may have to learn by dealing with setbacks and unimpressive gains. The trick is not only to make money off of trades but to learn WHY you made that money. And if you simply get lucky now and then, you haven't learned anything you can turn into a consistent strategy of success over a career, or even a lifetime, of day trading.
• That's why successful traders bank on consistent profits. They know that ignoring the small-profit trades and angling for a "grand slam" is a sure way to lose money. No one can repeatedly predict huge gains on any one trade. But many people can and do predict a host of small-profit trades that create the same, if not more, profit than people who get extremely lucky once or twice.
• Besides, you know that your system is working well if you can almost always profit, even on a small scale. You know you're working in the right direction, and only have to revise your plan to increase profits rather than starting over completely. Someone who depends on making a "grand slam" does not have that same insight and is essentially just gambling.
• For that reason, it is vital to understand that successful traders recognize that a "good" trade has nothing to do with profits or losses. Evaluate your trades on whether or not they followed your trading plan to the letter. Even if you do lose money, as long as you stick to your plan, you have made a "good" trade. At the end of the week or month (or whenever you reevaluate your strategy), you can look at profits and losses, but you will also be looking at overall trends. And tweaking trends rather than reacting to individual trades is much more likely to help you develop a consistently profitable trading career.
• If you can integrate these insights into your own psychological mindset, you'll gain a significant edge in the market. I can't stress this enough: the right mindset is one of the keys to investment success, and most traders fail to understand this.

#7 Focus on Following Your System, Not Your P&L

• Successful traders pay attention to their emotions. They try to keep a distanced, critical eye on how they are reacting to the market in order to control their emotions instead of being controlled by them. This helps them stay cool, calm, and focused on their long-term goals instead of getting overly afraid or excited about the trades they are paying attention to at any given moment.
• Furthermore, successful traders know what type of trader they are. They don't force themselves to trade with methods or strategies that do not fit their personality. Too often, people will hear about another's success and, whether out of envy or a lack of self-confidence, they feel compelled to copy that person.
• This is a recipe for failure. You will only be successful with strategies that you understand and have confidence in. Almost any strategy can be successful if used in the right hands, and your goal should be to find out what works for you. There is no magic strategy or everyone would already be using it. But to know what works for you, you have to pay attention to your own comfort levels, your own insight and intuition (which strategies just seem to "click" for you), and what inspires confidence and security in you.
• Finally, know when your emotions are becoming too powerful. Recognize when you are starting to trade based on a reaction rather than a plan. Successful traders take time off when they see themselves starting to act this way. They realize the importance of taking breaks from trading and the markets to clear their heads. They also know that stopping for awhile can help them regain focus on their long term goals and their overall strategy, not the success or failure of individual trades.
• Keep your mindset focused on your system, not your bottom line. A series of losses may actually be more profitable in the long term if they teach you how to improve your system or help you identify a particular technique that works. This is what it means to keep a long-term perspective, and the most successful traders know that the long-term is the only thing that matters in day trading.
• If you can integrate these insights into your own psychological mindset, you'll gain a significant edge in the market. I can't stress this enough: the right mindset is one of the keys to investment success, and most traders fail to understand this.

#8 Don't Let Negative Emotions Control You

• Successful traders do not allow negative emotions to affect their decision-making. Trading is a stressful process, and you will experience many setbacks. Expect them, however, and don't see losses as indications that you will never succeed. Instead, be prepared to identify your negative reactions and act on them in positive ways.
• Successful traders turn fear into gain. They realize that losses are a part of their business, and they expect them. But while they know that some trades will cost them money, they let those same trades become a gain in knowledge. Remember that each time you have a loss, this gives you some guidelines on how to alter your strategy. Perhaps your stop loss needs to be set higher, perhaps you need to alter how you identify trends, or perhaps you need to use new indicators.
• The key point is to remember to turn fear of loss into anticipation of learning. Otherwise, your fear can cause you to forget to ask why that trade was unsuccessful and, in the worst cases, to unwisely overtrade to try to compensate for your loss.
• Along similar lines, successful traders do not blame anyone or anything for their losses. They accept their setbacks and refuse to dwell on them. Instead, they learn from their mistakes and move on with their trading. Focusing on blame can cause you to feel insecure and lead you to make unwise trades to compensate for your losses. Or you may feel a desire for revenge against some non-existent enemy that "caused" your loss. Both of these emotions will distract you from your real goal of understanding how to revise your strategy based on what you learned from this trade.

#9 Take Action

• Finally, successful traders always take action. They don't let their fear con­trol their decisions or interfere with their trading. They don't linger unnecessarily in a losing position, hoping for things to turn around. But neither do they let insecurity prevent them from making trades or acting according to their plan. There is always time to revise your plan and try it again. Day trading requires trial and error, and you should act confidently, knowing that even if you lose money, you will gain insight into how not to lose money in the future.
• If you can integrate these insights into your own psychological mindset, you'll gain a significant edge in the market. I can't stress this enough: the right mindset is one of the keys to investment success, and most traders fail to understand this.

- Sameer Jain, New Delhi