Introduction
To be a profitable trader you have to understand and constantly work on two things:
- How to trade profitably
- Strategy & Risk Management
- How to execute your plan consistently and avoid making mistakes
- The mental game of trading
You see, creating a profitable trading and risk management plan is only one step on a long road to being a profitable trader. Executing on those plans consistently day after day, week after week, and year after year, is a mental game.
To trade profitably long term you have to understand how to win the mental game of trading, and that’s what I’m going to cover in this article.
Constant Pressure
Being a trader means to be under pressure constantly. Whether you’re in a trade or not you will feel pressure, and whether you are winning or losing you will feel pressure.
If you don’t put measures in place to keep you focused on doing the right things consistently, that pressure will lead you to make mistakes, and those mistakes will either hurt or ruin the profitability of your trading entirely.
All of the advice I’m about to give you is aimed at making yourself accountable, and giving you the tools you need to be consistent throughout your trading journey. This is not about doing everything perfectly right away. It’s about putting good processes in place, and then consistently taking steps to improve on them.
If you do these things and focus on accountability, consistency, and constant improvement, then, no matter how small your individual steps forward are, you will eventually lead yourself to a successful outcome.
Understand Your Strategy
Okay, before we go any further… you absolutely must have a:
- Profitable trading strategy
- Risk management plan
- Detailed trading plan
If you don’t have any one of these things any success you might have will likely be short lived.
It’s important that you have thoroughly tested your trading strategy so that you understand its tendencies. At a minimum you should know the following information about your strategy:
- Average number of trades per day it produces
- Average win %
- Average reward to risk ratio
- Average losing streak length
- Longest losing streak over a significant number of trades
- The market conditions that suit your strategy
Without this information you won’t know whether what you’re experiencing from one moment to the next is normal or if it should be a cause for concern. You also need to know these things to create your risk management plan, otherwise, how do you even know if your risk management plan is viable?
Understand that the distribution of wins and losses your strategy produces is entirely random. You cannot predict whether the next trade will be a win or a loss, so you have to understand the tendencies of your strategy in order to keep your emotions under control during sustained winning and losing periods.
Processes to Enable Consistency
In order to trade your strategy consistently long term, you must implement processes to:
- Identify abnormal trends in your trading results, as they develop
- Identify repeating errors in the execution of your trading plan
- Keep yourself accountable to the trading plan you have created
- Continuously identify areas for improvement
Putting these processes in place will help you remain patient, disciplined, and consistent throughout your trading journey. Those three things are arguably the most important traits a trader must have in order to be profitable long term.
Logging Trade Data
To trade profitably long term and catch yourself making mistakes, or identify abnormal trends in your trading, you have got to be able to review your trading data.
There are third party apps available for doing this. I personally use some sheets I created in Excel. You can create yourself a document in Google Sheets, Microsoft Excel, etc, that will allow you to capture all of the data you need in order to monitor and review your performance.
Useful trade data to capture:
This is not a comprehensive list. You can also think about things like maximum adverse excursion and maximum favourable excursion (MAE & MFE), and anything else you can think of. I personally grade my trades ‘Good’ or ‘Bad’ so that I can quickly filter data to show trades where I made a mistake.
Once you are capturing detailed trade data you can build reports that will show you key information about your trading that will be invaluable as you progress on your trading journey.
It is also a good idea to take screenshots of your pre market analysis chart, and of the trades you take at the point of entry and exit, so that you can see a picture of what you were looking at when you made those decisions to open and close the trades.
Be sure to make notes around your reasons for entering and exiting trades, or any other trade management decisions such as moving your stop loss or taking partial profits. You will appreciate this information when you are reviewing your performance at a later date.
Journaling
When you review your trading performance you will identify issues, and if you’re not journaling you will likely miss patterns outside of trading that are affecting the way you execute your strategy.
It’s a good idea to write a little each day about your mindset, sleep quality, diet & exercise, and anything else that might be on your mind.
This information will really help you understand the personal triggers that affect your performance.
It’s really not difficult to keep a daily journal, just get into the habit of writing a little every day and you will soon identify what things you need to write about that will be useful for future you to know.
Regular Performance Reviews
Daily, Weekly, Monthly, Quarterly, Annually… Do not avoid regularly reviewing your trading performance.
This is when you review your trading data and your journals to measure your performance against your trading plan.
I personally like to back test my trading strategy through the review period, just to see how it performed when being executed optimally versus what I did in real time.
When you’re reviewing your performance take your time, and be honest with yourself. Think about what you did well and what you can improve on, and think about any outside factors that may have influenced your trading decisions. Make some simple notes to review each day until your next performance review, to help keep you on track.
Healthy Living
Being fit, well nourished, and well rested is absolutely essential to giving your mind the resources it needs to function at its best when you’re in front of the charts and under pressure.
Simple things such as getting enough sleep, going out for a walk in fresh air before a trading session, and not eating a carb filled meal before or during a trading session can be a great help.
I’m no fitness guru, and so I am not going to give detailed health & fitness advice here other than to say that if you want to succeed at trading, it is definitely worth investing some time and effort into consistently improving your physical health.
Conclusion
The key with all of these things is to start simple daily habits, and then continually make progress. You’re not aiming for perfection right out of the gate. Start regularly doing each of the things I’ve suggested here, and over time you will see for yourself how they help you, and how you can improve each of the processes to suit your needs.
Be consistent in tracking and analysing your data, and seek to improve your performance over time. When you do this consistently it really doesn’t matter what your starting point is, because the processes you follow each day will naturally lead you to consistently grow and improve as a trader. If you keep doing that it is inevitable that you will eventually find the success you are looking for.
