It’s estimated that around 95% of traders don’t make money.
That number is tossed around all over the internet. It refers to active traders.
It might be too optimistic.
According to a study on speculators in Taiwan’s stock market from 1992 through 2006, only 1% of active day traders predictably profit.
Investors do better than active traders because they’re making fewer decisions.
But the average investor still underperforms the market.
You may not be day trading, but you’re probably trying to beat the market.
So, let’s be optimistic…
The roughly 5% of active traders who do make money exhibit certain beliefs.
A market psychologist who worked with elite traders found that they shared five common beliefs.
Among them, winning traders believe trading is a game.
Sounds elementary. But a game-like mentality brings out the best in traders — and it will do the same for you…
The Pitfall of Paper Trading — Don’t Give in to Your Emotions
New traders are directed to start with a simulated trading account — or “paper trading.”
Paper trading is like a game.
It lets a trader place and track trades as if they were real.
But they are not.
There is no real money on the line in paper trading.
Paper trading orders are not submitted to a securities exchange. Order processing, liquidity and pricing are also different when you’re trading real money.
But the most crucial difference is not mechanical … it’s psychological.
TD Ameritrade’s Thinkorswim paper trading account cautions its users:
“Once real money is on the line, your emotions … alter your decision-making process.”
When we have no skin in the game, when there is nothing on the line, our emotions don’t impact our decisions as much.
We’re free to play.
That’s good. And it’s how paper trading provides experiences that teach us to get in and out of trades for the right reasons, and not the wrong ones.
Not every scenario is the same, but any decision that defies the rules of your system, for example, is probably a wrong reason.
As soon as we put real money in our trading account, we’re prone to making bad decisions.
We throw right reasons out the window. We act as if money is important. And we refuse to believe that it’s ok to lose in the markets.
This is the wrong mindset…
Trade Like It’s a Game
The right mindset must be cultivated and guarded so our emotions don’t sabotage our trading.
To learn more on this market-based belief, watch my YouTube video below. Or click here, to be redirected to the video.
Let me give you a real-life example…
I played baseball in college.
When I’d step into the cage for batting practice I felt like I could knock the cover off the ball. I could hit it almost anywhere I wanted.
But come game time, my performance suffered.
In less time than it takes a fastball to cross home plate, emotion sabotaged my game.
Suddenly, there was something on the line, and I didn’t play the game like a game.
I played it more like every pitch was life or death for my self-worth.
I’d swing at bad pitches. I’d abandon proper mechanics. I’d try to do too much.
Instead of playing to win, I was fighting to not lose.
Winning traders play the game to win. They trade as if there’s nothing on the line.
They take the good trade setups and let the bad ones go by. They follow rules to manage their trades — and their emotions — because they know rules are critical in a proven trading strategy.
Winning traders don’t try to do more than their system warrants.
When traders have a streak of five losing trades, they don’t abandon their system out of fear.
When they have a streak of five winning trades, they don’t alter the size or frequency of their trades to satisfy their greed.
They know their system makes the difference between winning and losing over time … so they follow it.
You Have to Visualize Success
Impulsiveness and heroics do not lead to the prize. If they did, more than 5% of traders would make money.
Leave those bad habits behind.
Instead, trust the system. Follow the rules. And play like it’s a game.
When your trades perform well, stay grounded. When your trades falter, don’t give up on your system.
Just as an athlete is not crowned unless he competes according to the rules, a prize-winning trader follows the rules of the game and the rules of the system.
But wait, there’s more…
Next week, I’ll tell you about the fourth belief common to winning traders: Mental rehearsal is important for success.
I may even bring the baseball analogy back, too.
Senior Analyst, Banyan Hill Publishing
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