As we find ourselves in the midst of a brutal bear market in 2022, it may be a good exercise to study the past in order to be better educated on what...
17 min read
John McDowell : September 20, 2021
Last Updated: June 7, 2022
As Lead Content Strategist, John diligently searches for ways to connect with day traders and provides training and education to those in this space.
No two traders are alike. That’s a fact. And the reason for this isn’t tied to the technical skill of every trader. Even with similar trading education, two traders could have vastly different success outcomes in the market. The reason for this lies deep within each traders mindset. To that end, we’ve set out to find the 12 most common mental habits affecting trading performance and what to do about them.
Before we discuss them, let’s set the stage with a chat about where we all come from. At the end of the day, change is only going to come through awareness. And while we all come from different backgrounds, you can always find common threads that run through our experiences as humans.
Everyone has one. Yet, all too often we never give a second thought to it’s implications on our lives, activities, or trading.
Think about it this way. Your personality is essentially the roles you adopt. It’s akin to your character. What makes you, you. How you’re perceived or how you think others perceive you, and so on. It’s even inclusive of how you perceive yourself and act out those assumptions.
Whether we like it or not, the culmination of our life’s influences may have a profound impact on our personalities and consequently our trading performance. Good or bad.
How were you raised? What influence did your parents have on you growing up? Were you lifted up, or were you brought down? Was life easy or a struggle? Somewhere in between?
These are tough questions that you may want to think about if you’re struggling to perform in the markets.
Were you given responsibilities and held to them? Perhaps your mom and dad had a list of “chores” you were expected to complete each day. If you didn’t complete them, there was either some kind of hell to pay or the consequence of completing them on their terms the second time.
Do you rebel against this structure?
Or, maybe you were the kid who didn’t have responsibilities. Who knows, broken homes abound. Fatherless, motherless, generations of kids have been running around searching for mentorship without really knowing what they’re searching for. This alone could be your motivation to get ahead in life. Dig yourself out of a generational curse, you say to yourself.
If that’s true, how often do you have to silence that voice that tells you you won’t make it? What put that voice there to begin with?
Were you taught to fear success? Fear risk taking?
Find a good 9 to 5. Pay your bills on time. Stay out of debt. Work for a pension. Raise a family. Work hard. Tow the line. That’s your lot in life.
Or maybe it was more like: “Do what you want.” Play video games. Eat whatever you want. Who cares if your room’s a mess or if the yard gets mowed or the trash isn’t taken out. If someone asks, just lie about it.
How about anger? Love? Affection? Loss? Humility? Perfection? Dig…. What’s your past telling you?
No, really. Think about each one for a moment. Do you blow up when things aren’t going your way? Why? When did that start? Does everything have to be perfect or you fall apart?
We’re not therapists here. But the point we’re trying to make is that you can’t go to war without counting the cost. If you haven’t taken an audit of the mental habits affecting your trading performance, perhaps it’s time to do so.
The #1 thing missing from most educational material on trading the markets is the admonition to new traders of how closely it relates to other performance professions. In a recent interview with Brett Steenbarger, he compared trading to a number of these professions. Here’s what he had to say:
Think about every performance field: athletics, acting, music. In none of those do we start out by following people online, doing some reading, and then trying to make a living from our performance. Rather, we recognize that it takes years of practice and mentoring to become a professional athlete, movie star, or recording artist.Dr. Brett Steenbarger, Ph.D.
Steenbarger is referring to proper expectation, repetition, proper modeling, and growth. These are the basic building blocks of learning. Set those expectations with a quality education early on, and the outcomes may be fruitful.
But what happens when the outcomes fail, even with proper education?
Are there underlying beliefs or mental habits that are limiting your trading performance?
That is the question we seek to answer. To that end, let’s uncover 12 common mental habits that could be affecting your trading performance.
We put this as number one because if you can’t level up with yourself, truthfully, then you’re wasting your time.
Honesty is simply an outward declaration of reality. If you struggle with it, perhaps you’re afraid of reality. You can’t accept that what you’re doing isn’t right, isn’t working. You want to cut corners. You’re undisciplined with position sizing, respecting stops, planning trades. But you continue to take trades and put on risk.
Deep down you imagine yourself a successful trader because of the lifestyle it can provide for you, but are you really being honest with where you are?
Rest assured the fastest way to going broke in the markets is by lying to yourself about where you are now and the bad habits you haven’t properly addressed.
Is your persona true? Are you being true to yourself?
If not, take a good long look in the mirror and assess where you are. How ugly is it?
The great thing is that once you’ve done that, the burden is lifted. Think about a time when you’ve come clean on something you were hiding. It’s such a relief to get it off your shoulders, right?
Simply embrace it. Own it. Change doesn’t come from fear of acknowledging the problem. Sweeping the truth under the rug doesn’t make reality any less true. Change comes when we are ready to be honest with ourselves.
Take the necessary steps to do this.
We’ve all heard the old cliché that expectation is the mother of frustration. Yet, we continue in these common paradigms, patterning our lives with unrealistic or negative presumptions about our success.
Our trading experiences are no different. What we bring to and expect from the markets tends to affect us emotionally.
As Dr. Steenbarger describes in his book The Daily Trading Coach,
If we expect good things, we tend to be optimistic and energetic. If we expect negative outcomes, we tend to feel anxiety. If we expect that success will elude us, we’ll feel discouraged and depressed. If we expect perfection, we’ll be continually disappointed with reality.Dr. Brett Steenbarger
The market is a lot like a looking glass. It’s liable to answer you according to the idols of your heart. Positive or negative.
For that reason, make sure you’re bringing the right expectations and perspectives to your trading experience.
Everyone loves making money, right? Of course they do.
If only it were easy.
Yes, yes. There’s money to be made in trading. But in our experience, there are only two people who make money in the markets. Beginners, and veteran traders.
And herein lies the difference between the two:
Do you love the applause of the crowd? Or do you enjoy the constant repetition on an empty stage until you’ve mastered your part? Do you find pleasure in the pain of the weight room and practice field, or only enjoy the goals scored beneath the bright lights of the stadium?
You can’t have one without the other.
Enjoying studying the markets, the charts, the lines, the tape, the constant pursuit of mastering yourself is a pre-requisite for trading. If you’re simply trading for excitement — the rush of adrenaline you get when you put on a random trade — you’re asking for a lot of pain.
Making money in trading is boring, for most people. And you need to understand why.
Good traders enjoy the process.
They have put in the time and work behind the scenes, like on empty stages and practice fields. Their performance is a byproduct of years and years of practice, research, and knowing probabilities. This brings them pleasure.
What about trading do you enjoy? Be honest….
Every stage actor has forgotten his lines at some point in his career. It’s an inevitable consequence of being human and trying to remember thousands of words in the heat of a performance.
Consider the time John Mahoney forgot his lines playing Harold Pinter’s “No Man’s Land” at Steppenwolf Theatre in 1981.
At a crucial part in the play, he couldn’t remember his dialogue but disguised his lapse in memory by walking around on stage, “filling up the (silence) with activity” that made it seem like a natural, dramatic pause in the dialogue until he could recount the lines in his mind and carry on where he left off.1
Most blunders on stage go unnoticed by an unassuming audience. Some actors make it up as they go until their lines return.
How does this apply to your mindset and trading? Glad you asked.
Trading isn’t a game of perfect. There will be days when you forget your discipline. You will have rehearsed your A+ setup a thousands times, yet the laws of nature will cause you to stumble. Some drunk guy in the front row will throw you off your game. Your mind will fail you, inevitably.
Trading performance, as in acting, is all in how you manage your emotions, pause, regroup, and rethink your scenario.
Be flexible. Be fluid. Have poise.
A sad truth is that unsuccessful, inconsistent traders have a problem with ego. The ego is that they think they can make decisions that they want to make, too early, and still find success in the markets.
There may be exceptions to this. But as a general rule of thumb, it doesn’t happen this way.
We like to quote from successful leaders and coaches in other professions, and there is no more successful coach in college football than Nick Saban of the Alabama Crimson Tide. During a 2015 season where some of his players got into trouble with law enforcement, he had this philosophical outlook when asked about the situation:
You kind of have a younger generation now that doesn’t always get told no, they don’t always get told, “this is exactly how you need to do it.” So they have this illusion that they have all these choices.
But the fact of the matter is, if you want to be good, you really don’t have a lot of choices, because it takes what it takes.Nick Saban
The parallel here to trading is uncanny. Sure, there are a lot of choices you can make when it comes to trading. And don’t get us wrong, strategy exploration is a key part of learning to trade. But what does your “strategy exploration” look like?
Chase that news play; buy that stock as it goes parabolic; try to time the top on a short; increase your size; average down; hang on for dear life?
We all make decisions in the market. But, if you want to be good at this, your decisions better be sound.
Do you have that discipline? Do you have a good mentor, a good coach whose process you trust?
One of the most dynamic and simple systems for making decisions in a volatile environment is called the OODA loop. It’s taught and employed by many first responders, police personnel, and military groups. It takes a lot of the emotion out of decision-making.
The OODA Loop stands for Observe, Orient, Decide, and Act. Like John Mahoney’s ability to improvise his circumstances, the OODA Loop is a process-oriented method for keeping soldiers level-headed and focused when all about them is chaotic.
How well do you solve problems in a constantly changing environment? What framework do you use?
The market is a mystery to those who haven’t studied it. Yet, to even the greatest of traders, there will always be changing variables. Whatever structure you can apply to your decision-making process in the heat of battle can make all the difference in how it affects your trading performance.
This is a tough one. We live in a time when almost everything is at our fingertips. Post-covid, this has become even more prevalent.
You can order your groceries from your iPhone and have them delivered within a few hours. Household items, furniture, clothes, yard workers, taxi service, you name it. Push a button on an app and, voilà, it’s there!
As a beginner in trading, we often want others to do the hard work for us. And, granted, there have been a lot of technical titans paving the way for many, many years. But following alerts, wanting to be told what to buy, needing the security of a paycheck, and just wanting to push buttons won’t always get you where you want to be.
Hard work in the market pays off over time, if the work is constructive. But what most don’t understand is that laziness is a reflection of our true desire and motivation.
Let’s return to the great work of Dr. Steenbarger. In a fantastic blog post and story involving his daughter and her procrastination habits, something very revealing occurred one day as she found motivation to work on something she really wanted. Steenbarger noted this about the event:
Everything we do in life–our work, recreation, relationships–is a mirror. It reflects an image of ourselves back to us. If we’re doing the wrong things in life, the mirror reflects a distorted image. Over time, we begin to mistake that image for reality. We really do think of ourselves as lazy or incompetent.
When we do the work we’re meant to do, however, the mirror reflects the best of who we are. Over time, we internalize that image and the pride and confidence that go with it.
People who are successful–in life and in markets–find positive mirrors. They have found markets and ways of trading that reflect back to them unique skills and talents.Dr. Brett Steenbarger
That’s profound in many ways. Too often we are prone to label ourselves or others as slothful in what we do. But the truth is that passion and motivation can be a good precursor for hard work and diligence to begin.
Perhaps we need a long look in the “career” mirror to decide if this is what we want to do?
Positive thinking. Yes, you might be thinking how cliché this sounds. Fluffy stuff, that positive thinking is. But the truth is that there is a great deal of scientific evidence regarding positivity and its effect on performance.
Consider the research of Barbara L. Fredrickson of UNC Chapel Hill. In an important study on the effects of positive thinking, Fredrickson found that research subjects primed with positive emotions were significantly more likely to see more possibilities out of life than those primed with negative emotions like fear and anger.
But the benefits don’t end there. Fredrickson has also discovered what she calls the “Broaden and Build” theory. This theory suggests that the more possibilities one sees in life, the more skills and resources they are able to build upon. Thus, the value and quality of life increases.
In other words, the simple presence of positive emotions opens possibilities, and that openness broadens acquired skills and resources. The studies are fantastic if you have time to read them. Or check this great synopsis on Huffpo.
The cool thing is that this applies to any area of life, and trading is no exception. When negative emotions overtake our trading, the mind is narrowed. When fear and anger set in, there aren’t many options for us to choose, and this affects our trading performance.
Along those lines, we thought we’d introduce the philosophy of Alan Watt to you. Alan has an interesting view of negativity that may help some of us.
The idea is called the “Backward Law” and is interesting to ponder. It goes like this:
“The desire for a more positive experience is itself a negative experience. And, paradoxically, the acceptance of one’s negative experience is itself a positive experience.”
What Watts is saying here is pretty simple when you think about it, and it resonates with Fredrickson’s research.
At the root of the law is “contentment” and resilience despite the circumstances. Contentment was one of the emotions studied by Fredrickson, along with interest, joy, and love.
In trading, if we can mollify the effects of negativity and negative experiences, we actually induce the effects of positive emotion. Reverse psychology if you will…hence the “backwards law”. We take the sting out of negative experiences when we see them in a positive light.
In like manner, positive emotion stimulates energy. One way to achieve this is through social stimulation. The more time we spend with positive, interesting and inspiring people, the more energized we become ourselves. And that energy produces the needed fuel for efficient work in the markets.
Hopefully this knowledge is a first step towards awareness and you can start building intentional positivity into your trading, no matter the circumstances.
There are a lot of little niggly things in our past that never really surface to our conscious minds. Yet, while they go unnoticed, these deep emotions and traumatic experiences can have profound impacts on our trading.
Often, we can go along just fine with most of what life requires of us, but when certain triggers surface, those old traumas inhibit our best intentions. And, unfortunately, these emotions can affect our trading performance as well.
Let’s first use an example outside of trading: relationships.
Many of us have either known or dealt with someone very controlling, jealous and self-conscious.
It can happen to the best of us.
Afraid we’re going to lose the one we love to a better suitor, or some other catastrophe in our lives, it brings out the worst in us. Feels awful. And, usually, it ends up being the self-antidote to the problem in that it either destroys the relationship we’re in so that we no longer have to feel jealous, or we’re forced to face those demons enough with a patient, loving partner until we overcome them.
The interesting thing about these issues, though, is that they’re often rooted in prior traumas. A parent that gave up on the marriage when we were kids, a divorce, lost loved one, abandonment, failed business partnerships, so on and so on.
How do these traumas apply to our trading psyche?
Perhaps you’ve suffered quite a bit of loss in your life. Are you bringing those scars and protective mental reactions to trading? It’s not a judgmental question by any means. Just something to think about for a moment.
Or, maybe your losses have simply been suffered in trading itself. Losing tens of thousands of dollars in one fell swoop is no easy pickle to swallow. Such trauma, like blows to the head, are difficult to absorb without some damage, seen or unseen.
If you feel like this may be the case, our friend Dr. Steenbarger has a checklist you can run through to help diagnose these issues.
Trauma may cause a lack of commitment and a fear of risk. After all, you don’t want to lose more than you already have, so you’re quick to take the profits you have, safely guarding what’s yours before the market takes it away from you.
At the end of the day, it may not be an easy fix. Ultimately, it may require the help of a coach or counselor. Créde Sheehy-Kelly is a licensed performance psychologist who’s seen this in many domains: professional sports, trading, performing arts, and even fighter pilots.
She offers this bit of advice that is worth consideration:
In my thirteen years as a high performance coach, I have seen again and again that often people are not even aware that they are suffering to the extent that they are. When we talk through performance issues in trading or sport and we seek to get to the root of the problem, often we will come to understand that life challenges outside of the trading or sports arena are impacting the person’s general mental well-being and having a knock-on affect on performance. In that case, the best action a person can take to improve performance is actually to seek help for the “off-pitch” challenges with a licensed therapist or clinical psychologist.Créde Sheehy-Kelly
Perhaps it’s time to reach out for help?
Yeah, you’re probably thinking, “what does love have to do with pushing buttons on ThinkorSwim?”
Be honest, how many times have you pushed your office chair away from the trading desk and mumbled something negative about how unsurprising it was that you screwed up yet another trade? Chances are, you used much more vulgar language than that.
Negative self talk is just a tell-tale sign you might be struggling to love yourself through this trial by fire. And that’s natural. We all get frustrated.
But habits are hard to break. To that end, why would you want to live with someone who puts you down all the time? Perhaps it’s time you breakup with your former self. Self-love is a mental habit that affects trading performance.
If you find yourself in a bad “self-relationship,” print off this great diagram that Dr. Steenbarger shares on his blog. Have it nearby as you trade and make note of how you’re treating yourself. It’s time you do better.
The best performances are often done when we’re “in the zone,” long after the hard work has been put in away from the cameras and spectators.
Let’s take an iconic sports star, Barry Sanders, to consider this.
Natural talent aside, there comes a time during a performance when all the hard work fades into the moment and the opportunity must be seized. Barry Sanders, one of the greatest NFL running backs of all time, was the poster child of focus every time he touched the ball.
It was all in his eyes. Barry thrived with an offense that allowed him room to move in the open field. His running was unorthodox in that he amassed just about as many negative yards as his positive gains.
But his talent lay within his vision and his ability to focus on more than even his eyes could see. He could anticipate two steps ahead of his defenders, finding holes and creating open lanes before they ever appeared.
He was brilliant to watch.
With eyes wide open, he absorbed every bit of information he could absorb and processed it in lightning speed, legs carrying him into the open field before his conscious mind could even calculate what was going on.
He was in the zone when he had the ball in his arms.
This may come as a surprise, but as a trader, you are no different than Barry Sanders on a football field. Having focus will affect your trading performance.
How often have you found yourself unfocused as the market opens? Are you taking the time necessary at the end of the day and on weekends to review your trades? Do you have a vision for where you’re going in this career? Can you trust your skill and intuition in the moment?
Every trade, every morning, every activity you do should be done with eyes wide opened and focused on the task at hand. It is a basic cognitive function that is required to make it in this business.
Veteran traders know the costs of distraction. Like a good running back, they’re focused on doing whatever it takes to score points. The slightest miscues could mean the difference between a winning trade and a losing trade.
Good running backs, like good traders, know where they are going on the field. They don’t have to be told. They don’t care about the noise of the spectators or the size of the defense.
Consider how focused you are on trading. Is this a hobby? What are your distractions? Too many alerts in your chat service? Trying to follow the leader but getting tackled?
Scroll back up and take another look at Sander’s eyes before you read on. Ask yourself, “How focused am I?”
We all remember those times we wanted to try something as a child after watching mom or dad do it. “I want to do it! I want to try!”
Little did we know that trying to swing a sledge hammer would be impossible with our little muscles, or that baking a cake would be so messy.
Granted, we’re all intelligent adults at this point in our lives — we hope anyway. But the correlation is there. Being teachable is a mindset habit that will affect your trading performance.
As Mike Bellafiore notes, when his traders work together to solve complex market problems, their performance increases more than when they work alone.
Likewise, when newer traders enter the SMB Capital proprietary trading firm, they are encouraged provide value to their teams. Check this account from Mike Bellafiore in a recent blog post:
“Let me offer an example from our firm on how a developing trader added value to a Senior Trader. This Senior Intern wanted to make the trading team of this Senior Trader. This is the best team at the firm, where all but one trader is consistently profitable. Getting on a team like this could make your trading career. The Senior Intern noticed a huge trading opportunity for the team. He couldn’t yet trade it effectively. But he found a way to help significantly.
That Senior Intern deconstructed the trading opportunity and then pulled the charts of similar trading opportunities like it for the team. Now the team could see how similar opportunities traded in the past. They gained more edge by understanding the history of these trading opportunities. The Senior Intern added value. Would you be surprised to learn this Senior Intern is now a member of that trading team?”Mike Bellafiore
No matter where we are in our progress as traders, it behooves us to keep a teachable spirit. Whether you’re part of a trading community or not, stay open-minded and bring value to your trading and your peers.
The ability to reset is paramount in the world of trading. Call it resilience, bouncing back, or whatever you prefer. Those who don’t take losses personally and have mastered a way to bounce back quickly are setting themselves up for success.
The secret to this is really no secret, however hard it is to learn as a new trader. That is, the market is a game of probabilities. You’re going to lose. And how well you lose will determine how much you win.
Take Kristjan Kullamägi for example. Kristjan is worth almost $100 million dollars. Yet, he started trading with only a few thousand, and blew up countless times.
Most telling about Kristjan, however, is his win rate, which is somewhere around 25%. Yes, you read that correctly. A man who has amassed tens of millions of dollars in about a decade only wins 25% of the time.
Think about that the next time you beat yourself up for a losing trade.
The stock market is a game of probabilities once you’ve discovered a systematic edge. Until then, it’s no surprise that you might suffer frustration from losses. You don’t really know what you’re doing or why you’re losing.
Consider what Kullamägi says about this on his website’s FAQ page:
The trick to re-setting is confidence and discipline in a tested edge. Do you have one, or do you trade random stuff?
We hope you’ve found this helpful as you build awareness around the mental habits affecting your trading performance.
Rest assured that you are not alone in your struggles, and that everyone’s weaknesses are different.
To help along your journey, we highly recommend the work of Dr. Brett Steenbarger and Créde Sheehy-Kelly. Dr. Steenbarger has a fantastic website with loads of free information. In the top left of his site, seen below, you can search thousands of self-help articles he’s written. His books are fantastic, too.
For more concentrated work on your mindset and limiting beliefs, Créde Sheehy-Kelly does a great job as high performance psycyhologist and coach. She has a lot of tools to help uncover and repair some of the limiting habits we create in our minds. Check out her site at CredePerformance.com
Also, be sure to check out some of our other popular posts on trading mindset.
Remember to take care of your mental health. Take the steps you need to take.