As a trader, a winning mindset is based on emotional control. Indeed, it has been shown that fear, anxiety, but also overconfidence and anger can bias the trader's point of view, resulting in different and less judicious financial decisions than those taken in a stable emotional state.
Mindset and behaviour play a major role. Read on to discover two pillars of success in trading.
Numerous studies on the psychology of trading show that the emotional state of the trader - their mental state at the moment - directly influences results. Some researchers even claim that the emotions felt by the trader during trading activity will be responsible for up to 80% of gains or losses!
For example, it has been shown that :
Poor emotion control leads to irrational decisions, which is contrary to the logic that is necessary to trading.
In this context, it is widely recognized that trading requires a certain mindset. Professionals believe that a trader must have a calm and rational mind, even going so far as to "turn off" his or her emotions in order to retain only the mathematical logic involved in an investment decision. This is obviously difficult to achieve. Here are two ways to get closer to it.
Algorithms are very popular in finance and not for nothing! Algorithmic decisions are based solely on the analysis of past data, without any possible cognitive bias.
A good trader is above all a specialist in financial transactions: they understand the financial indicators, the products they are dealing with and the variables that can influence their price. Their knowledge is both economic and stock market related. No decision is taken at random. This is what we call the winning mindset of the trader since, by mastering the field, a trader will naturally act in a rational way, according to the evolution of the financial markets - a thousand miles away from instincts and impulses of the moment... Of which he will moreover detect the incoherence compared to the logic of the prices. Developing knowledge of the stock market allows traders to limit irrational decisions and, by extension, financial losses.
Gains, losses, risks... Even with a solid knowledge of the stock market, trading is an activity with fluctuating results, likely to provoke emotional instability at any moment, blurring the mathematical logic that must be part of a financial decision. Thus for a winning mindset, investors must challenge themselves to get rid of the “emotional elevator”, whose harmful effects are well-known.
Traders must disengage themselves as much as possible from financial risk. To do this :
This type of strategy limits the risk of loss on each trade, freeing the investor from financial stress and various strong emotions that interfere with rationality. Furthermore, by following a predefined trading plan, the trader can avoid impulsive exits. In conclusion, a winning mindset does not suffer from any emotion or, above all, cognitive bias.
It is based exclusively on the logic of the markets. For this, two fundamentals need to be worked on :
Note : A study published in The Conversation claims that a dose of anxiety can be a trader's salvation. More to the point, the study shows that "emotional" investors - those who experience the most stress during their trades - are more likely to succeed than "cold, rational" investors.
Anxiety would indeed lead to more measured risk management and more thoughtful decisions. These results are in contrast to the usual theories in psychology, which value the trading algorithm and the absence of emotion as a model for successful investing.
When it comes down to it, it would seem that the winning mindset of the trader can be found in a happy medium between no emotional elevator at all and strong mental agitation.
