The market doesn’t know or care about what you think or feel. The stock market is just a mechanism for sharing and displaying information. However, we as humans are constantly distorting information being displayed to us with our pre-existing beliefs. In order to listen to what the stock market is telling you objectively, you need to eliminate biases and emotions that prevent you from objectively seeing what the market is telling you. The most important mindset you need to have is one of open-minded conviction as a professional stock trader. So how do you develop this mindset? Here are 3 critical beliefs and actions you must take in order to adopt this mindset while you are trading.
The Stock Can Do Anything
In order to be a successful stock trader, you have to understand that this is a game of probabilities. If you cannot accept that you will be wrong sometimes, you risk ending your trading career in a short period of time. You have to trade what you see, not what you hope. Accepting that any position you’re in can do anything, and preparing for each scenario, will make huge improvements on your trading decisions. You cannot ever go into a trade thinking “this will be a winner no matter what and I will just hold it until it goes up”.
You really just have to prepare for two different outcomes once you are in a stock: The stock hits your stop loss or it hits your first profit target. When it hits your first profit target you need to know if you will take partial profits or take the whole thing off. There are many different profit taking strategies, and you need to find one that makes you the most comfortable.
Know You Are Trading A Strategy With An Edge
You will never have true conviction in your trading if you don’t know if you are trading a strategy that has an edge. This means that your trading strategy has to have net positive expectancy over a sufficiently large sample size (of at least 40). If you are trading a strategy with no edge, you are just gambling. In order to know you have an edge, you have to record and study every single one of your trades. Every successful stock trader has an extensive collection of trading data.
When you are trading a strategy that has an edge, you will have true conviction in your trading. You won’t get scared when the stock goes against you. You won’t have fear whether your stock will get to its target or not. You will not fear to miss a big move because you know where your edge is, and know that you cannot be in every trade. The trade either works or it doesn’t, and you know that is better to be on the sidelines in cash than trading with no edge.
“Markets Can Stay Irrational Longer Than You Can Stay Solvent”
Timing is everything in trading. Every stock trader has to be able to define the timeframe you expect your thesis to be right. Even if you have strong conviction about your idea, you have to be willing to take a loss when the stock is not cooperating with your thesis.
For example, there are a lot of traders out there who short overextended penny stocks that have made big runs to the upside. Yes they are piece of shit companies that will most likely retrace back to where they came from. But just because they are a junk company doesn’t mean they have to collapse as soon as you start in short.
I have seen junk companies run 100%, fade off 25%, then run another 300%. Shorting is a strategy where you can lose more than just what’s in your trading account because theoretically, a stock can go up forever. Your broker will not care how bad the company you are shorting is. The stock is still in an uptrend, and you are about to lose your whole account. They will liquidate your position and there goes your trading account.
Risk management is everything in trading. Trading is a game where huge wealth can be made in a short period of time, but just as much can be lost in a short period of time. 100 green days in a row can be wiped out by one red day. You must understand and accept this belief in order to survive as a trader in the long run.
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