The difference between success and failure for many people in a wide range of fields is
mindset, and the long-term success of traders working for proprietary firms is no exception to
this.
A golden rule of trading is that whilst anyone can hit the jackpot once, making consistent, strong
gains based on a fundamentally sound trading strategy is much more difficult, and central to that
success is the mentality you bring to the trading floor.
This does not simply mean taking a disciplined approach to following a trading plan, although
having a trading brain can certainly help in some respects.
Instead, it is about understanding how mental health and your state of mind can affect your
portfolio, how to develop your mind and your body in a way that helps build the best possible
trader, and why focusing on yourself and your needs is critical for making money.
This guide aims to provide some practical tips for developing mental fitness, as well as
explaining why it is so important to be mentally and physically ready before you take to the stock
market.
Why Does The Market Hurt Us?
Everyone has a story like this. They start the day with the intention of making some trades, so
they hit the markets and look for potential action.
After doing the research, they put together a plan of action, make some investments and make
a few small gains. This is good, positive work and on its own might make a trader feel fairly
positive.
Then one trade goes badly wrong. Maybe it was a miscalculation, maybe it was some terrible
shocking news or an announcement that did not go the way anyone expected or wanted, but
regardless of the reason it is trading at a much lower price than anyone expected.
Despite the other trades doing cumulatively well enough to offset it, that loss stings and can be
particularly distressing for a relatively new trader to the point that it can possibly cause long-
term damage to their career if they learn the wrong lessons from it.
Whilst everyone tries to trade objectively, the pressure of hitting targets, the desire to build a
portfolio and the pressure of significant amounts of money being on the line can lead to feelings
of stress and anxiety that only magnify when trades do not go your way.
Everyone reacts to these negative emotions in different ways, but it shakes your concentration
and confidence, which is not only negative now but can lead to a domino effect of bad
decisions.
How Does Mental State Affect Trading Performance?
Whilst a lot of economic models like to believe in the idea of a perfectly rational homo
economicus that always has the facts at their command and trades consistently and rationally
within the bounds of their own self-interest.
In practice, few people are like this, and not every automated trading system is completely
rational depending on the strategy it is programmed to follow.
The entire school of behavioural economics has tried to explain the specific aspects of how
psychology and the mental states of everyone who interacts with financial markets shape them
in some way, but for the most part, the ways in which mentality affects financial performance are
much easier to see.
Stress and anxiety have clear physiological, neurological and psychological effects on people,
including, but far from limited to:
● Direct and indirect effects on physical health due to the effects of cortisol, poor sleep,
lack of physical activity, poor diet and so on.
● Increasing impulsiveness and reactivity to the market. Every trade that is down for the
day can feel devastating and lead to overcorrections.
● Damaging logical reasoning and the ability to judge decisions, largely due to creating a
rather narrow approach to potential solutions.
● Creating a warped interpretation of market information and what it means, which further
affects decision-making. A tiny loss is a sign to jump off the sinking ship when it could
easily be a minute-to-minute market correction.
● Damaging self-esteem, which reduces the motivation to trade and affects the belief that
we are traders capable of making good decisions. This can lead to poor decisions and
accentuate the other four factors.
● Shortening memory and attention span. If you cannot focus when doing your due
diligence, you are more likely to invest without all the relevant facts at your command.
Most of these factors of stress affect people in other walks of life as well, but because the
pressure of trading is so high, the effects of stress are so acute that it is far more noticeable
here than it would be in other fields of life.
Everyone is guilty of falling into the trap of trading emotionally, but the best traders find ways to
ensure that they trade in a healthy, disciplined way that emphasises mental fitness.
How Do You Build Mental Fitness?
Much like physical fitness, something that can also help, mental fitness is not an innate state of
being but a toolkit of skills and exercises that when regularly practised will build into an overall
state of mind.
There are many elements that form part of the complete picture of mental fitness, but the three
most important and the ones that can be trained for the better are confidence, emotional
intelligence and mental resilience.
Confidence And Positive Self-Talk
Everyone needs a degree of confidence to succeed in any endeavour they embark upon. At the
very least, someone needs to believe they are able to learn and develop their skills to create a
foundation for success.
A secret weapon in this regard is positive self-talk, which is a consistent set of affirmations that
help to counteract the negativity that can happen during a bad day.
Bad luck can turn a good trade into a losing one, but rather than allow the corrosive idea that
you are responsible for elements outside of your control, focus on your process and method,
that you have made successful trades before with this strategy and will do so again.
Emotional Intelligence
Everyone gets emotional. That is not necessarily the issue. Where the problems come in is
when these emotions are left unchecked and unobserved. If you are mindful of your own
feelings you can notice them start to develop, how they impact your decisions and avoid
impulsive decisions.
In this regard, a trading journal is an invaluable companion. Not only is it useful for keeping track
of trades, but it also helps you understand the reasoning behind these decisions and how
successfully they worked.
Resilience
The vast majority of your decision-making when trading should not be on the platform itself. It
should be in the development of strategies and trading plans, which are robust, comprehensive
and well-researched enough to remove a lot of the stress from moment-to-moment trading.
The less you have to think, the less stressful these decisions will be, and it pays to front-load
those big decisions in a situation that is less time-critical and without the many pressures that
are associated with trading.
Trading plans are often adjusted on much slower turnaround times than an impulsive trade, and
generally only needs to be examined and altered a few times a year at most. It also includes risk
management plans so you do not have to worry at all times about being caught in a severe
losing position.
It is not completely objective, but it allows you to worry about the higher-level parts of the trading
plan when you are in the headspace to do so, rather than having to make big decisions every
time you enter and exit a position.
Healthy Body, Healthy Mind, Healthy Portfolio
Those three elements are at the core of mental fitness, but there is a lot more that goes into
building up mental fitness in trading, including improving your physical fitness.
The mind-body connection is an increasingly important part of mental health explorations. Whilst
psychology was previously considered largely siloed away from physical health, the connection
between physical activity and mental health cannot be ignored and should be harnessed to
make a better person and a better trader.
Fear and stress are mind-killers, figuratively and literally, and if regular exercises can help
reduce that stress, they remove a barrier that is in the way of your success, take away a voice
that tells you that you cannot do what you know you can, and help improve your focus.
Whilst something of a truism, regular exercise also helps improve sleep quality. Sleep
deprivation has a wide range of effects and the better your sleep, the more energy you will have
to focus on the important decisions rather than being distracted.
Beyond this, it is always best to take breaks from your trading terminal. Being hunched over a
computer is not a healthy position to keep for hours at a time.
Whether you go for a jog around the block, go to the gym or do a few stretches and have a
breather.
As well as this, avoiding processed, high-energy foods such as fizzy drinks, fast food and
sweets in huge quantities can help reduce accentuating and augmenting the stress you can feel
in certain situations.
Finally, if you are having a difficult trading day and it all feels too much, it is absolutely fine to
turn off the terminal and try again tomorrow. In many cases, the worst decision for your mental health, physical health and portfolio health is to react to bad news by making worse decisions.