How to develop a stock trader’s mindset?

Every year, new traders get inspired by heartfelt stories of stock traders who became crorepati! Stories of people turning their thousands into crores are common in news channels inspiring everyone to try their hand in the world of trading. However, very few people succeed in this business. Unlike popular opinion, there is no secret to making money in the market. In fact, it is all about the mindset! Mindset is what separates a professional trader from an amateur. Let’s understand how a new trader can build the right mindset to launch their trading career. 


A quick summary before we understand a trader’s mindset in detail. 

  1. Approach trading as a business, not a hobby  
  2. Understand the trading philosophy 
  3. Decide your risk, reward will follow
  4. Trading is 10% strategy, 90% discipline 
  5. Become a master of your trading style
  6. Know when not to trade 
  7. Stock doesn’t care about your trading position 
  8. Do not paper trade!
  9. Review your trades over the weekend
  10. Today is not the stock market’s last day 
  11. Find every reason not to take the trade 
  12. Choose one – Money or Ego!
  13. Never stop improving 


  • Approach trading as a business, not a hobby  

Stock trading is not a hobby. The idea of simply pressing a few buttons on your computer screen while comfortably sitting on your bed in your pyjamas sounds like a very casual activity. However, trading is everything but casual! Professional traders approach stock trading as seriously as any other business. They record their performance, review it & try to improve upon it just like any other businessman. 

Every single successful business requires a great plan. Even though the act of buying & selling stocks looks simple, there is a lot which goes behind the scenes when coming to the decision of which stock you should trade. Every single trade should be meticulously planned with clear entry & exit plans. A trader who takes trades just based on his/her guess without any plan is destined to fail sooner or later. 


  • Understand the trading philosophy

Stock trading is a simple game of probability. Imagine playing a game of coin-toss with your friend. For every head, you will win Rs. 2000 but for every tail, you lose Rs. 1000. What do you think is going to happen in the long run? Clearly, if you play this game long enough, the chances of head or tail becomes 50/50. Therefore, you will make Rs. 2000 for every winning coin toss & lose Rs. 1000 for every losing coin toss which will eventually make you a ton of money! 

This is the exact game which you have to play with the stock market. Every winning trade wins you more & every losing trade loses you less. If you can give up on your desire to make money in every single trade, you will end up making a lot of profit. Please note that to play this game correctly you need to properly follow the stop-loss (never lose more than Rs. 1000 per coin-toss). Also, you need a balanced strategy which will win you around 50% of the time (there is no need to be right all the time). You should not book your profits too quickly & always focus on your risk-reward ratio (minimum 1.5:1). A simple game can teach us the important principles of stock trading! Once you are confident enough, you can raise the stakes as much as you want (e.g. Rs. 20,000 for every win & – Rs. 10,000 for every loss).

To learn in detail about a trading system which professional traders use, visit this article! 


  •  Decide your risk, reward will follow

An important insight from the coin-toss game described previously is that you need to fix your risk as a professional trader. No trader can make money in the market by taking random risks without proper money management. If you play the same coin toss game with your friend, however you start losing Rs. 3000 on a tails (instead of losing Rs. 1000 on a tails), then the entire game will change. In fact, the longer you play, the more money will keep on losing because you are taking bigger & bigger risks without the appropriate reward to compensate for the loss! 

A smart trader always focuses on the amount of money which he/she is willing to lose to the market. The profit which is made is simply the by-product of playing the game long enough. 


  • Trading is 10% strategy, 90% discipline 

Many new traders focus too much on a winning strategy without paying much attention to the most important part of stock trading – discipline. A trader should have the discipline to play the same game with the market over & over again. The more you try to spice things up, the more mistakes you are bound to make causing you to end up losing money. 

Even if the trader has the best possible strategy in the world, it is useless without proper money management discipline. If you decide to take a risk of 50% of your account on a strategy which has a win rate of 90%, you will blow up your account very quickly. Your strategy which is 90% effective is of no use when you take such high risks! Money is not made in the market by a good strategy, rather it is made by consistency. 


  • Become a master of one type of trading

Too much focus on strategy leads a newbie trader to explore multiple types of trading. Sometimes, they trade using moving averages, sometimes based on bollinger bands, sometimes support & resistance and sometimes based on RSI/MACD. Even if the newbie trader sticks to one type of indicator, they end up changing something or the other – trading on 50 SMA some day, switching to 50 EMA the next day, moving to 20 EMA after that and so on. 

Such a trader is always looking for the “best” trading strategy which will finally lead him/her to make a lot of money in the market. However, the truth is that there is no magical strategy in the stock market! Every trader who is profitable in the market makes his/her money by becoming an expert in a specific type of trading. The focus of a successful trader is not on learning a new strategy every week, rather on improving his/her existing strategy to perfection! 


  • Know when not to trade 

A trader who masters one style of trading knows one important thing which newbie traders never understand. Your strategy won’t work in every market type! A trend trader cannot trade in a choppy market. A momentum trader cannot trade in a low volatility market. An option seller cannot make money when the VIX index is rising. An option buyer cannot make money when the VIX index is falling. An important part of trading is understanding the strengths and weaknesses of your style of trading. 

When the market is unfavourable, the newbie trader keeps on trying his/her luck while a professional trader waits patiently for his/her favourite market type to return. Avoiding losing in trading is as effective as entering winning trades! 


  • Stock market doesn’t care about your trading position

The stock market doesn’t care about your trading position! A stock moves simply based on the transactions which happen between buyers & sellers. If a big buyer enters a stock sending the price to skyrocket, they do not care about your short positions. Similarly, if a bear attacks a stock, they do not care about your long positions. 

The ability to control your trading position size depends completely upon the trader. A trader who is able to manage his/her risk properly will always be able to control his/her trading position size. Any day in the market can be a doomsday & any day in the market can be a euphoric day depending upon the world events. A professional trader always protects his/her trading account while the newbies get crushed! 


  • Do not paper trade!

Contrary to popular belief, paper trading is useless! Paper trading lacks the most essential elements of stock trading – risk, emotions & money management. It is essentially a forward testing tool which you can use to test your strategy. However, the strategy plays a very minor role in the success of a trader. The key differentiator between a professional trader & a newbie trader lies entirely on the mindset. Mindset is developed when the trader embraces the importance of money management, perfecting a trading style & understanding the trading philosophy. 

Paper trading lacks almost all of these elements of trading & generally ends up being treated very casually by a trader. Remember, trading is a business, not a hobby! Trying to learn real trading by doing paper trading is equivalent to learning swimming without stepping into a pool – you will drown during the real action!


  • Review your trades over the weekend

Professional traders record and review their trades over the weekend. Every single trade which a professional trader takes is based on the strategy which the trader has perfected. The perfection comes by executing the strategy & reviewing the executed trades over the weekend. You will be surprised how many mistakes a trader can make (unknowingly) under pressure during the trading day. A weekend review allows a trader to re-think his/her strategy with a cool mind & check if the strategy has been followed perfectly or not. Figuring out your bad trades (where you were emotionally charged) & eliminating them from your trading day can single handedly turn a losing trader to a profitable trader. Newbies do not review their trades because they do not take the trading business seriously, therefore they end up being a losing trader. 


  • Today is not the stock market’s last day 

Stock market opens every week for 5 days (unless there is a bank holiday). This means that there is an ample amount of opportunity for a trader to make money in the market. Newbie traders get worried when they miss out on 1-2 opportunities thinking that those opportunities might never return. However, a professional realizes that the stock market will not close forever. It is perfectly okay for a professional trader to not take any trades during a trading session when there are no opportunities. Even if the opportunities are missed, it is still better to let them go & find new opportunities. One secret about the stock market is that there are always new opportunities around the corner to trade frequently! Only the one who is patient enough to wait for them will make money in the market. 


  • Find every reason not to take the trade 

Newbie traders like to take as many trades as possible to increase their odds of success. The result however, is that they do not make any money due to high commissions & brokerage. Also, taking up too many trades reduces their efficiency causing them to have a low win rate while trading. If you want to learn more about win rate in trading, visit – What is a good win rate for professional traders?

A professional trader tries to find reasons to not take a trade. In fact, every trade should be questioned thoroughly to make sure that only the best trades are executed by a professional trader. This increases your odds of success in the trading business as well as highly reduces the brokerage & commissions cost which you have to bear. Ask yourself the following before you take any trade – Is this trade good enough? Or Is this trade a low-probability trade? If the answer is the latter, then such trade should be skipped! 


  • Choose one – Money or Ego!

Many new traders lose money due to their ego. Let’s consider an example. Suppose you think that the price of Tata Motors is going to increase to Rs. 500. The stock is currently trading at Rs. 425. You think about taking up a trade at the current market price with a stop-loss of Rs. 400. But while you were thinking about the trade, suddenly you notice a rise in the price of the stock! Right in front of your eyes, the stock price rose from Rs. 425 to Rs. 460 within minutes. You end up panicking and buying the stock at Rs. 460 for the target of Rs. 500. So, what just happened? 

You thought that the price of Tata Motors would go up. You were proven right by the market when the price rallied from Rs. 425 to Rs. 460 within minutes. However, buying the stock at Rs. 460 is a highly unfavourable risk-reward ratio for you as a trader. You ended up risking Rs. 60 (Stop-loss is Rs. 400) for a target of Rs. 40 which is a terrible trade! You did not buy this stock to make money, you bought this stock to make yourself feel good. Just because the stock did exactly what you were thinking the stock would do, doesn’t make it a good trade! A good trade is where you can make big profits with a small amount of risk. Everything else is just there to make you feel good. 


  • Never stop improving

Successful professional traders always learn new things. They keep on perfecting their strategy to the point where their strategy becomes highly profitable. The stock market is a dynamic place where traders need to be on their toes all the time to stay profitable. There is no one magic strategy which you can use to make money for your lifetime, instead a successful trader learns how to adapt based on the market conditions to turn the tides in his/her favour. 


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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.


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Namit Pandey

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