The key to becoming a great trader is cultivating and developing the right psychological makeup. Acquiring the capital, tools, and knowledge to be a trader is the easy part. It is having the right mindset and emotions that will determine your ultimate level of success.
Some people have a natural proclivity toward the psychological traits that are needed to be a successful trader but anyone that is willing to work at harnessing and developing their emotions can build the mental foundation for a career in trading.
There are four basic psychological traits that great traders must cultivate.
- Persistence. The most important trait that a trader can possess is persistence. Successful trading is a function of slogging away day after day for years. When I look back at my own trading career it is clear to me that what has benefited me more than anything is that I work at it every day. Trading can be very frustrating and disappointing but you can't let those challenges stop you.
The nature of the stock market is cycles and that means that all traders will experience cycles of success and failure in their own trading. You will go through some very rough periods that can last many months. It will feel like you can't do anything right and never will. It is necessary to reject that voice in your head that tells you that you are wasting your time and keep at it. As long as you make sure you protect your capital, you can keep trying and eventually you find things that work. The cycle will work in your favor if you stick with it
- Patience. Patience works hand-in-hand with persistence. Traders often think that they have to be in constant motion, buying and selling but it is the ability to shift from long periods of doing little to sudden decisive action that is the hallmark of great trading. Too often the novice trader expects that a trade will work immediately instead of formulating a plan and giving it time to work. Traders must also recognize that there may not be an opportunity at any given moment. Sometimes it is necessary to sit and wait for the right conditions to develop. You aren't going to make money every single day and if you try too hard you are likely to produce poor results.
- Optimism. A positive mindset is fuel for great trading. I know - without a doubt - that there is always another great trade out there. I just need to keep looking for it and developing the right strategy and it will eventually happen. I also know that I will have some very bad trades along the way. You can't have great trades without having bad ones as well. I just need to make sure that the inevitable runs of bad luck don't impair my capital or my confidence. Great traders will be big and bold when the odds are in their favor and that isn't possible to do unless you cultivate an optimistic mindset.
I know that the market isn't going to go straight up. There will be some ugly bear markets but if you are optimistic then you are confident that poor market action is what is needed for new opportunities to develop. Great traders celebrate bear markets and downtrends because they are optimistic that a new supply of money-making trades will eventually develop. Don't just sit and hope the market will do what you want. Plan for it to be uncooperative and stay positive so that you can leverage your trading ideas.
- Humility. All traders are at the mercy of the market beast. There is no way to know what it might do and we will be punished if we start to believe that we can predict its next move. We need to do our best to take advantage of what it offers and not start to think that we have it mastered.
A big part of humility is the acceptance of the fact that we can never stop learning. Not only do we have to constantly learn new basic information but we also have to learn how the market is constantly evolving. Trading today in the age of computers and passive strategies is different in some ways than in the past but also similar in some ways. We have to admit that we simply don't know the answers and we have to find ways to move forward regardless.
Trading has the potential to be extremely lucrative but that is because it is difficult. It is because it is hard that good traders can do well. To effectively deal with the challenges of trading, you need a strong psychological foundation. If you focus on these four traits, you are well on your way to trading success.