As with everything else in trading, successful traders think differently about their trades. Believe it or not, how you think is critical to your success and the way you trade.
The Key Thinking Difference of Successful Traders
Let’s contrast one of the key differences between successful and the rest of the traders in how each thinks. This is an important distinction and understanding it will benefit you if you are working on becoming a better trader.
The successful trader views each trade as part of a larger portfolio of trades. They know that it is the sum of all their trades that truly matters, not the outcomes of single trades. Many traders take an opposite view. They care deeply about the outcome of each and every trade with a strong bias towards winners. If you were somehow able to get inside their head and hear them thinking, you might even hear that each and every trade has to be a winner. But this is deadly thinking.
How Thinking Affects Trading
This kind of thinking—that each trade outcome is critically important and trades should result in wins—causes all kinds of trouble for the trader. It is a fundamental source of loss aversion and leads to the strong tendency to cut winning trades short and hold losing trades too long (both actions are done to avoid loss).
A Study with Vital Information for Traders
In an important study for traders, one group was instructed to “think like a successful trader” and treat each trade as one of many trading decisions which will sum together to produce a ‘portfolio’ of their trading. The comparison group was instructed to just trade as best they could. After trading for a while, results were measured and the differences were eye-opening.
The group instructed to measure their performance based on all trades taken together not only performed better than the comparison group, they substantially reduced the psychological significance of any individual trade and the tendency to commit loss aversion behavior. Moreover, brain scans showed reduced activity in the amygdala—the brain’s fear center. This is vital information for traders because the amygdala has been shown to directly respond to the threat of a trading loss. When a loss is perceived, the amygdala sends out a powerful emotional signal that overrides rational response and triggers the loss aversion behaviors of cutting winners prematurely and hanging on to losers. This didn’t happen when study participants thought like a successful trader.
The Benefits of Adjusting Your Thinking
When traders considered each trade’s outcome as only one of many trade outcomes, several positive things happened. It reduced loss aversion in the actual choices made, reduced amygdala arousal, and increased areas of the brain that regulate emotion and provide rational responses. In other words, thinking like a successful trader led to internal regulation of emotional signals.
The Takeaway Message
The message is clear: If you live or die on the outcome of every trade, stop it. Start thinking like a successful trader: Each trade is only one of many trades I will make and added together, they will reveal both my edge and my trading performance.
For more on how to think like a successful trader, you are invited to access the author’s free 7-Part Guide to Mental Trading Skills at the author’s website. Just click here.