What Separates Good Traders from the Bad Ones?

Let me tell you a little story… On a beautiful late spring afternoon, twenty-five years ago, two young men graduated from the same college. They were very much alike, these two young men. Both were better than average students, both were personable, and both - as young college graduates are - were filled with ambitious dreams for the future.

Now imagine that today we set them off trading. Through a gift, they start with the same starting capital, the same trading platform, and the same trading system with precise rules for entry and exits.

Shockingly, there is a difference. After one month, one trader has gone bust, while the other has returned a 20% profit.

Have you ever wondered, as I have, what makes this kind of difference in people's trading? It is not always a native intelligence, talent or dedication. It is not that one person wants success and the other does not.

The difference lies within your psychology. Your psychological mindset is likely to play a larger role in your trading career than your chosen technique or any other details associated with your day-to-day practice.

Now, I am not the only one to discover this… In his book, Trade Your Way to Financial Freedom, the renowned American psychologist Dr. Van Tharp discusses the role psychology plays in your trading success. He divides trading into three 'Ingredients of Trading'. In his pie chart, System is 10%, Money Management is 30%, and 60% is psychology. He discovered that the trader's psychology has more to do with his success than anything else does.

What exactly is your psychology?

In short, your psychology refers to your emotional responses to a given situation…In trading, fear, greed, vanity, pride, hope, jealousy, denial - all these can affect investment decisions. Although your aim in the market is to maximize your profit and minimize your risk, emotions often make this easier said than done.

For example, traders who react emotionally, make the wrong decision – such as the common mistake of holding a losing position in the belief that someday it will become a winner.

This classic mistake is called loss aversion. Loss aversion refers to the tendency for people to strongly prefer avoiding losses than acquiring gains. Some studies suggest that losses are as much as twice as psychologically powerful than gains. Loss aversion compels most traders to hold a losing stock while it plummets downward. This clouded judgment clearly contradicts the trading adage “cut your losses.”

These investors also engage in other forms of irrational behavior, like attributing success to skill, and losses to bad luck. Worst of all, this is just the tip of the iceberg when talking about the other devastating effects of trading using your emotions.

The truth of the matter is, without controlling your emotions, most new traders lose all their money very quickly in the markets. In fact, most are completely wiped out within the first year of trading. So, as you can see, your emotions do play a big part in determining whether you fail or succeed……..

How Can You Reduce the Effects of Emotion & Negative Psychology?

The answer is discipline – without it you will lose.
Discipline in the following three areas of trading will ultimately determine your trading success.

• Training - The successful trader never rests on past successes, or believes that his trading ability has peaked. He is always learning and practicing his decision-making skills, honing them until they become second nature. Then he can react faster than a speeding bullet, but with the benefit of superior human judgment. (That is what this course is all about).
• Trading Rules - The successful trader develops set of trading rules – a plan – that he follows religiously. This guides his decision-making at all times. If a trader’s plan dictates that it is time to exit a stock, the trader will exit that trade and not wait a minute longer. (We will cover this topic in detail in the next chapter).
• Self-Control - Successful traders display an extraordinary amount of self-control. Keeping emotions constantly in check, the disciplined trader is immune to the highs and lows that attend large market swings – whether panic, in a downturn, or of euphoria. I will show you how to learn the secrets of discipline.

These components may seem like a tall order. But that is exactly the point – trading is difficult work and serious business, demanding time, patience and a great deal of hard work. Master these components and you are on your way to success. Step off the straight-and-narrow path of discipline you will meet certain financial ruin.

The key message about discipline is that without it you will lose. It is that simple. You may think, “I understand and I will be disciplined in my trading.” Nevertheless, this is where fear and greed enter into the picture. Shortly after this an emotional rollercoaster ensures the stability of your character.

Can Discipline Be Learnt?

The big question here is whether you can develop the discipline you do not have naturally. I believe the answer is “yes, you can,” but you must have the necessary commitment to do so.

Clearly discipline can be developed, and you only need to look at an army training program for confirmation of this fact. However, it is one thing to have a vast and experienced organization bearing down on you and being prepared to do whatever it takes to make its point. Nevertheless, it is quite another to do it yourself in the comfort of your own home, with all of the distractions of daily life.

Clearly, self-discipline is a requirement even to start this process.

Ultimately, undisciplined behavior is going to be punished by the market, either by direct losses or by the loss of profits which otherwise have been available.

Private traders who persevere do have external stimuli that will help the process. However, the market does not help as much as it might, because of the principle of random reinforcement. It is the market's tendency to reward bad behavior from time to time.

This crucial fact is one of the reasons why it takes so long to learn how to trade. You need to realize there is no point in having a system, if you are not going to follow it.

To speed up the process of learned discipline, you can read the book Dr. Alexander Elder, author of “Trading for a Living”, wrote the forward to. Titled the “The Way to Trade” I believe, after reading it, it’s easy to see why Dr. Elder said…

“In the book you are about to read, John Piper takes you beyond theory. He provides an essential lesson that most will never get.”

This testimonial alone is enough to make “The Way to Trade” required reading. Moreover, it will give you a great foundation that we build upon in later chapters. Therefore, before moving on to the next chapter, purchase “The Way to Trade” by John Piper and read it from start to finish.

You can either go to your local bookstore and/or purchase it online by clicking here. By ordering online you can begin reading it within 5 minutes and there’s also a few added bonuses.

Let’s get your psychology right.

MUST DO ACTION STEPS: Click Here to purchase a copy of “The Way To Trade” by John Piper. Your goal in reading this book is to gain an overview of trading and, more specifically, to learn trading discipline.