How can we stabilize our trading mentality?
I've noticed that many people tend to attribute their failures in trading to a poor mindset.
Of course, a poor mindset can indeed lead to numerous issues. For instance, if you are someone who generally has weak self-control, this flaw will be greatly magnified in trading. You might find yourself unable to resist the urge to trade excessively, or you might not be able to curb your greed, or you might start to get carried away as soon as the trades go smoothly, and so on.
However, by focusing too much on the "poor mindset," there's a risk of simply looking for an excuse for one's failures (I may not be diplomatic, but that's the reality).
We should still think about this issue from the root: what exactly causes a poor mindset during trading?
Firstly, your poor mindset might be due to your inadequate trading skills.
A friend sent me his recent trading statistics. He's currently facing the largest drawdown he's ever encountered, and he's asking me whether he should continue.
This is clearly a case of fear in trading. Seeing such a large drawdown, he's starting to lose confidence in his trading system, unsure whether to continue, and even beginning to doubt the effectiveness of his trading system.
This is because his trading skills are not yet up to par.
Firstly, he doesn't fully understand his trading system. He's unaware of its breakdowns, the extent of historical maximum drawdowns, how many consecutive stop losses it might incur, or how long the drawdown period might last. He doesn't know any of this and hasn't tested it.
Secondly, his trading system is too rudimentary, with too many errors and not stable enough. At this point, he needs to introduce some filtering conditions to improve the success rate of his trades. It's better to wait a bit longer and make fewer mistakes.Furthermore, his position sizing is also unreasonable, and the losses are too severe after a series of mistakes. The daily fluctuations in numbers are heart-stopping, how can such trading be done well?
So these issues are not about mentality but are still at the technical level. If this friend has solid skills, has done a lot of review before actual combat, and patiently tested with simulated accounts, they would have identified the decay issues of the trading system, prepared in advance with a plan, optimized the trading signals, reduced the number of consecutive errors during decay, used more reasonable position sizing, and controlled the amount of drawdown. In that case, trading would be confident and well-prepared, how could there be such fear and worry? It's still because the technical skills are not up to par.
One minute on stage, ten years of hard work off stage. Don't just see how mature traders are so calm in trading; behind it, there are many tears swallowed, many pitfalls stepped on, and a lot of money lost. It's actually a mentality forged through blood and tears. To take fewer detours, one still needs to start with trading techniques, learn more, and practice more.
Secondly, your ambition exceeds your capacity to bear, and your mentality is naturally prone to collapse.
Many people want to make 10 times the profit with one sum of money, but behind that is 10 times the risk. Many people can't bear it, but mistakenly think they can.
For example, if you enter the market with 1 million and want to make 500,000, then you also have to bear the risk of losing 500,000. You think you can bear the risk of a 50% drawdown, but in reality, when you lose 100,000, your heart is already aching. When you lose 200,000, your hands start to shake. When you lose 300,000, tears are about to fall, how can you adjust your mentality? There is no mentality to speak of because it completely exceeds your capacity to bear.
That's still a relatively reasonable state, but some people want to make 1 million with 100,000, so they keep adding leverage, and it's not a 50% drawdown issue anymore, it's a total blowout issue. I think for traders who have been in the game for so many years, the pain and torment after a blowout are really a constant, daily pain.
So maintaining a stable mentality is simple: assess your risk tolerance, how much money can you afford to lose?
The standard is that after all this money is lost, it has no impact on your life, and your mood is also undisturbed, or there is a little bit of a sting, but it's not devastating, then this is your bearable range.
Then we use this position size to trade, and there will be a significant improvement in mentality.Additionally, we must learn to confront our true selves.
Everyone harbors a degree of perfectionism, wishing for market trends to unfold exactly as planned, hoping for a trading system with high accuracy, a large profit-to-loss ratio, a low rate of consecutive errors, minimal drawdowns, and ideally, a system that is all strengths with no weaknesses. When we fail to earn the profits we anticipated, we may become restless and agitated.
In life, we also desire to appear perfect in the eyes of others, striving for universal approval and often overlooking our flaws while emphasizing our strengths, even convincing ourselves that there is nothing wrong with us.
However, human nature is inherently imperfect, and the trading process is no exception. It is bound to encounter various setbacks and drawdowns. We must accept the imperfections of our trading systems just as we accept our own flaws.
Instead of lamenting why we always seem to seek but never obtain, it may be because what we are seeking is not right in the first place. Forcing things to happen without results is futile. It is better to reduce our desires and be content with the outcomes we can realistically achieve, for that is the most genuine approach.
I believe that facing our true selves and acknowledging our human desires requires a certain amount of courage, but it is also an essential path to stabilizing our emotions.