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Trading Psychology: The Total Commitment to Trading

In this lesson, we will discuss some concepts that have helped me and many others become successful traders.  While each individual trader will develop his or her own discipline, it’s important that all new traders make a total commitment to this livelihood.

What does being wholly committed entail?  It means repositioning the priorities in your life so that trading is at the TOP of the list.  Because it is hoped that this goal is likely to increase your wealth, you will need to eliminate anything that will get in the way.  In the end, you will be able to provide a better lifestyle for your family and yourself.  Here are some ideas to help you:

1. Streamline your lifestyle  

Your most important single action is to cut out all legacy expenses – cars, vacations, big screen TVs, restaurant and bar tabs, etc.  It’s imperative that your trading decisions are not influenced by your need to make a payment or have spending money in your pocket.

Take a hard look at your budget.  Put your expenses into two categories: essential and the others. Try to eliminate as many of “the others” as possible.  Every dollar that is spent on the others is a dollar of capital that could be employed in your trading account.

When I started floor trading in 1997, I lived in a tiny studio apartment.  I cut my expenses to the bare minimum: A car was a luxury that I did not need so I sold it, eliminating a car payment, gas, parking, and insurance expenses.  Those savings really helped me at the beginning of my career. (The added benefit here is that when your lifestyle becomes less comfortable, your mind sharpens.  Sometimes you need to take a step back before you can move several forward. It worked for Rocky Balboa against Clubber Lang and it will help you achieve your goals, too!)

2. Set aside 18 months of living expenses

Once you’ve pared down your monthly expenses DO NOT START TRADING until you have set aside 18 months of living expenses in savings.  You will need to live off of this money so you can keep all of your trading profits in your account. It is vital that you not tap into your precious trading capital for a long time.  This capital allows you to trade bigger, which should be one of your goals.  In theory, increasing the size of your trades should increase your profits.

Set a goal and do not withdrawal capital until it’s achieved.  For some, the goal is to purchase an exchange membership. For others, the goal is the minimum amount that they feel will allow them to trade comfortably. And, when you achieve that goal, only slowly withdraw capital. Set the next goal a little more ambitiously. The idea is to always set the bar higher while maintaining a frugal lifestyle.  I stayed in that studio apartment for nine years before I bought a larger place!

3. Be as disciplined as an Olympic athlete 

Markets open and close at the same time every day. This is good news for you.  It enables you to set a daily routine for each trading day.  It forces you to be completely disciplined, like an Olympian training for the games. And it easily enables you to prioritize your schedule. Wake up early enough every morning so that you have enough time to eat breakfast, get to your trading desk and have at least one hour to catch up on the overnight markets and breaking news. You need to have the same routine at the same time every day.  And remember to fuel up with a healthy breakfast because you should be skipping lunch in the beginning.  It is very important to stay focused on the markets even when you do not currently have a position.

When the trading session is over, print out all of the day’s trades and go over them in your head.  Try to analyze why you made those decisions and how you could have improved your timing.  I used to go over the dupes on the trading cards every night, and I learned a lot from the bad trades.  It’s even easier to obtain the information from your front-end software package.

Eliminate late nights out – stay home.  There’s time on the weekends to hang out with friends.  However, Sunday evening through Thursday evening need to be spent preparing for the next trading day.  Whether you use technical analysis or study the fundamentals, spend an hour before bed to mentally prepare yourself ready for the next trading day.  Get to bed at the same time each night so you have plenty of rest.

4. Trade distraction-free: simplify your screen, positive feedback loops 

Traders, for the most part, are naturally ADHD.  This usually helps them interpret a huge amount of data and make split-second decisions. You can greatly improve your decision-making ability by narrowing the number of tradable markets and by staying away from your browser. Electronic traders often get lulled to sleep in slow markets (which occur around 80% of the time).  The browser on your desktop can be a silent killer if you let it distract you.   Once you start surfing, you can easily lose track of the markets and your profits.  Markets move lightning fast and you need to be aware of every movement to get in or out of your trades.  It is really important to block out all sports, gossip, and adult–related sites, and only use the internet for market news and market-related communication.

More than 90% of floor traders specialized in one market.  Floor real estate was very valuable so it was not smart to move around a lot.  When electronic trading appeared on the scene, traders celebrated that they could now trade multiple markets from a single screen.  Unfortunately, it has been my experience that trading profits are inversely correlated to the number of markets one can trade.  I would pick no more than three markets to trade and watch one or two indicators.

Last, you need to surround yourself with other traders who are both knowledgeable and positive.  You can trade more effectively when you have smart individuals that you can bounce your trade ideas off of.  And it is supremely important that those other traders see the glass full of water and the sun shining every day.  Anyone who thinks it is anything less will drag down the performance of the group.  Positive loops make everyone a better trader; negative loops destroy morale and trading accounts.

5. Be a Buddhist 

The best traders never get too excited when they have a great day and never get too down when they have a bad one.  You always should be trading in the middle.  It’s really the only way to keep your sanity.  The business has so many highs and lows in even a single session that it is imperative to keep your mood in the middle. The path of moderation is away from the extremes of self-indulgence and self-mortification.

6. The most important rule in trading 

Finally, every trader should adhere to only one rule:  Make sure you can trade the next session.  A wise trader once told me that and I have never forgotten it.  As long as you never risk your whole account, you can always earn back whatever amount you are down.  It may take a week, a month or even a year, but you are still in the game.  You rarely get more than one chance in this business so please don’t mess it up.

Good luck and may the trading gods look upon you favorably!

By Dante Federighi