The Mental Game of Trading

I wrote a blog recently debunking the idea that golf is 90% mental, and I want to expand that to where I believe the mental game fits in to your performance as a trader. Whether you are a golfer or a trader, your job is to execute. Whether that’s hitting the right shot, or making the right decision at the right time. The only difference is that a golfer uses their body to execute their strategy and a trader uses their mind.

So the question every trader has to answer is simple: what do I need to learn, what are the skills I need to train, and how can I best prepare myself to consistently execute the right shot or the right decision? First and foremost you need trading skill. The mental game can really only help you to become a better trader once you have a strategy based on your knowledge reading charts, technical analysis, and other skills.

In my last blog I said that if golf was 90% mental, then the Dali Lama would be an amazing golfer, but he isn’t. The mind is only so powerful. I say this, so you now I’m not one of those ‘gurus’ blowing smoke up your ass claiming that a positive mental attitude is what you need to be a successful trader. Bullshit. You need to know what the hell you’re doing. Without a trading strategy based on a foundation of knowledge, there is no way to prove your results aren’t just dumb luck.

The mental game of course has a role, a critical one in my view, but I think a lot of people, including many of you, have been turned off by the presumption that the mental game is more important than trading skill.

Mental game and experience

How important is the mental game to trading? That depends on your level of experience. The more experience you have as a trader, the more likely that variations in your decisions and execution are a result of variations in your mind. The less experience you have a trader the more you can assume that poor decision making comes from a shortfall of trading knowledge, making the mental game a secondary concern. This doesn’t mean that a new trader can’t address the added pressure of trading the live market, for example, but they must do so only after closely analyzing their errors in decision making. The experienced trader on the other hand, needs to fix the mental game flaws that produced their mistakes.

Too often experienced traders ignore the mental side and falsely assume they’ll avoid future mistakes by improving their trading skill – improving their technical analysis, for example. Of course this can be important, but unless you address the mental side of your trading mistakes – such as, exiting a trade too early, hesitating on entry, or forcing a trade – they  will persist. This is why experienced traders can immediately benefit from improving their mental game.

Now that you’re clear on the role of the mind, let’s talk about what I mean by the mental game. I like to use the term mental game, as opposed to mindset or psychology mostly because a ‘game’ requires skill, and skills can be learned. This goes against popular wisdom that suggests a strong mindset can be easily acquired just by knowing how ideally think. So, if you fear getting into a trade during a choppy market, you should just be fearless and make the trade. Or, if you tend to force a bad trade after several losing ones, just “be patient!” and wait for the right set-up. Improving your mental game requires training. You can’t develop the right mental perspective for trading that quickly, just like you can’t become a skilled trader that quickly.

The mental game sharpens, strengthens and prepares the mind to function at its highest level – and it is what allows you to consistently make the right trades. Rather than thinking of the mental game as an alternative to your technical or market knowledge, think of it as something facilitating your ability to use that information while trading.

Of course, having a strong mental game doesn’t mean you won’t have losing trades. Instead, think about how much money having a strong mental game can make you. Simply estimate how your trading mistakes cost you, and costly it is to get angry, fearful, or greedy. My guess is it’s a big number. So even if you were to iron out just a few of those wrinkles in your execution, it could provide a huge return on your investment in my coaching.

If you are not considering sharpening your mind as part of your development as a trader you are adding risk and variability to your trading. You obviously can’t control the variability in the markets, but you can control the variation within you.

Written by Jared Tendler

October 21, 2014

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