The Mind of a Trader

Successful futures trading begins by understanding your own psychology. Futures markets have a way of stripping away the masks that people put on in everyday life, immediately highlighting any inner weaknesses. This is costly, both personally and financially. Most beginning traders are mentally ill-equipped for the futures markets.How much of a role do you think luck plays in whether or not a futures market trader is successful? After all, when you invest in the futures market, you’re basically deciding whether the price of a certain commodity is going to increase or decrease at some point in the future, so you’ve got a 50-50% chance of making the right guess and turning a profit, right?In the long term, trading success is not about luck. Mental attitude and thinking skills are the edge. Trading decisions that are based on emotions like stress, fear, or overconfidence generally won’t get you the returns you expect. The skills that may have got you where you are in your career or profession are different to those needed in the market, and you will need to either learn some new thinking skills or lose your money.The traders mindset is tested in two situations - when a position moves against the trader and a loss is incurred, and when a position is in profit. Typically the losing trader will hang onto the loss in case it comes back, but will sell the winning position. The winner will take small losses, but aims to make large profits by letting profitable positions run until there is a clear signal to close them out.The best traders have common personal characteristics in common that you will need to adopt, in addition to the cognitive skills to develop and test a coherent trading plan.Winning traders are disciplined. They are prepared to invest time and effort now for a future outcome. They will stick with a plan rather than being tempted to trade on the latest chat room gossip.A winning trader thinks clearly and is not self deceived. They do not deny reality. They understand their own limitations as well as their strengths.When backtesting, they try out different scenarios, even if that spoils what seems to be a good system. If a trade goes against them, they do not blame the market, accuse their broker of malpractice or “double up” on a losing position for when their trade will supposedly bounce back. The successful trader faces reality head on and implements a tested plan. There are no surprises, only decisive and premeditated action.When the first astronauts were trained, what they were asked to do was a lot different to what they had done before. So nothing was left to chance. They were trained for every scenario. They did not second guess each situation, instead they knew exactly what to do and did it. You need to be the same with your plan.Good traders are self confident. They believe that since they have invested time and effort into their training (through paper trading or simulation), and developing and testing an approach that they can stick with it. They do not doubt themselves when faced with some losing trades. They have learned to separate their own self worth from their winning and losing trades.The successful trader whilst being confident also respects the market. He or she manages risk carefully, using trading stops and money management techniques. The good trader is conservative, and aims to make money over time with a plan rather than taking foolhardy risks aiming for the big chance payoff.Don’t let your overconfidence get in your way. When traders get on a winning streak, their overconfidence and their egos sometimes grow too large and they lose the discipline and focus needed for success. If this ever happens to you, rein these in fast or you might find your streak quickly coming to an end! The very top traders are almost egoless in that they have separated their ego needs from their trading.I’ve touched on some of the mental characteristics of top traders. In future postings, I’ll discuss this topic further.