The Right Trading Mindset

Table of Contents

• I. Understanding Risk

  • What is a bad trade and example

• II. We can lose any trade we take

  • Example: Weighted coin

• III. Trading Strategy

  • Brain Dump

Questions to Reflect Upon:

1. Do you find yourself doubting your decisions after entering trades?

2. Have you experienced fear or anxiety while in a trade?

3. Have you struggled to stick to your initial trading plan, making impulsive changes along the way?

4. Before entering a trade, do you always have a well-defined plan, or do you sometimes act out of fear of missing out (FOMO)?

Key Insights from Mark Douglas:

Mark Douglas emphasizes the significance of understanding one's psychological tendencies in trading and managing emotions effectively. Traders can benefit greatly from learning from experienced individuals and studying successful trading strategies.

Additionally, it is crucial to note that a substantial percentage of traders, around 95%, suffer financial losses because they lack a well-thought-out trading plan. Having a clear and structured plan before entering trades is essential for consistent and profitable trading.

I. Understanding Risk

What is a bad trade and example

After performing our technical analysis (TA) or acting impulsively due to FOMO, we decide to take a long trade, setting specific Stop Loss and Take Profit levels. Throughout the trade, each downward movement triggers fear, while each upward movement ignites hope or greed.

Initially, the market exhibits an uptrend, but gradually, the market structure starts to shift, forming a series of lower lows and lower highs. As soon as we witness the first confirmation of this market structure change, we reassure ourselves that if the price goes below the lower low or our predefined invalidation point, we will close the trade. However, as the price creates lower highs, we begin to doubt our earlier decision and entertain the idea that the market might reverse upward. Nevertheless, the market consistently moves downward, and we continue grappling with these conflicting emotions until either our position is liquidated or we incur significant losses. What to do ?

• Set a clear invalidation point for each trade to know when to exit if it goes against you.

• Avoid holding onto a bad trade after hitting the invalidation point, hoping for a reversal.

• Emotionally detach from the trade and focus solely on the chart and technical analysis.

II. We can lose any trade we take

• Acknowledge and accept the risk involved in each trade before entering it.

• Use Stop Loss and Take Profit levels to manage risk and potential gains effectively.

• Understand that trading involves probabilities and focus on maintaining a probabilistic edge.

• Approach trading like a casino owner, where the odds are in your favor over the long term, rather than a player seeking quick wins.

Example: Weighted coin

We are essentially betting on a weighted coin that has a 70% chance of landing on heads. However, we must avoid putting all our life savings on heads because there's still a 30% chance of losing.

Over a series of 50 coin flips, we become more willing to take the risk because, more often than not, heads will be the result. Yet, even with this probability, we can never be 100% certain of the outcome of the next coin flip.

It's important to remember that any trade or technical analysis we make can be invalidated by external factors, leading to potential losses, no matter how promising our setup may seem.

Our trading strategy is designed to increase our probabilities of winning over the long term, much like a casino owner who knows that while some players may win occasionally, ultimately, the casino makes a profit at the end of the day.

III. Trading Strategy

Challenge yourself to work out a specific setup that you will take for the next 25 trades. Stick to this setup regardless of what others may be saying, and block out any external influences.

For each trade, use only $1 as your initial investment. Keep a detailed record of each trade's result, what went wrong, and what could be improved.

After completing the 25 trades, assess your win percentage and evaluate if any adjustments need to be made to your setup.

If your win rate is higher than your loss rate, you can consider scaling up the same setup for bigger trades. However, be mindful of any tendencies to exit trades prematurely or change your strategy when dealing with larger amounts. If this happens, revert to smaller trades until you find your optimal risk tolerance.

Taking trading seriously requires completing this challenge. Focus on making $1 trades initially to build discipline and consistency before scaling up.

If you can successfully complete the challenge with $1 trades, there's no reason why you can't do it with larger amounts like $100,000.

The goal is to develop a systematic and robotic trading strategy that eliminates emotions from your decision-making process. This disciplined approach will lead to better trading outcomes in the long run.

Brain Dump

1. Dealing with losses in trading is crucial. Instead of dwelling on losing trades, I focus on learning from them and moving on to the next opportunity. Emotions must be controlled to avoid negative impacts on future trades.

2. Understanding my strengths and weaknesses as a trader is essential. By capitalizing on my strengths and working on my weaknesses, I can improve my trading skills.

3. I aim to detach myself from the monetary aspect of trading and solely concentrate on making sound decisions based on market analysis.

4. Self-belief and perseverance are vital in trading. It's important to strike a balance between confidence and humility, acknowledging both strengths and areas for improvement.

5. To trade effectively, I must internalize market information and develop keen observational skills. By paying close attention to the market and staying intuitive, I can make informed decisions.

6. An open mind and non-judgmental approach are critical. I must be adaptable and let the market guide my actions, avoiding rigid beliefs that may hinder my progress.

7. Listening to the market and adapting my trading style to changing conditions is essential for long-term success.

8. Slow, organic account growth is preferred over rapid expansion. I must stand the test of time and avoid self-sabotaging behaviors.

9. Avoid self-sabotage by being self-aware and honest with myself about my trading habits and tendencies.

10. I must embrace challenges and continuously engage my brain to keep my trading approach fresh and adaptive.

11. Stay focused on the present moment and the next trade, rather than getting caught up in past successes or failures.

By following these principles, I can cultivate a successful trading mindset and improve my overall trading performance.