Stock trading is a profession which is extremely competitive with only 2% of the people making any profit. With such a high level of competition, it is crucial for stock traders to be at their best to make consistent profits in the stock market. Most retail traders focus on finding new techniques or strategies which will make them a good trader. However, no amount of strategies will be of any help if the trader doesn’t have the right mindset!
The right mindset is the most important thing for a stock trader. A trader can do everything right but a few simple psychological mistakes can ruin it all. A competition in which 98% of the people lose, even a small mistake can be the difference between success and failure. Here is a sneak peak into the mind of a successful trader.
1. Discipline is key
Discipline is the most important factor which differentiates a professional trader from an amateur trader. An amateur trader takes a trade without any strategy based on their feelings whereas a successful trader follows a set of rules rigorously. A successful trader doesn’t get extremely scared by losses or extremely delighted by profits. Having a fixed set of rules and following them rigorously is the method by which successful traders make consistent profits in the stock market. If you are looking for a profitable trading system, visit this article!
2. Every trade has a risk
A successful trader realizes that every single trade has a risk involved. There is a risk involved for every reward! A successful trader always limits the capital which he/she risks in a trade. Newbie traders start taking huge risks after taking a few successful trades hoping to make quick money and end up losing it all. Every trade has a risk involved and thus the trader needs to be prepared to take up a loss every time. Making smart decisions in terms of risk management goes a long way in a trader’s journey.
3. Limit your losses
The basic principle of trading is simple – make more money than you lose. Not even the most successful traders are nowhere near a 100% win rate. In fact, most professional traders have a win rate of about 50-60% which means that even the successful profitable traders are wrong 40-50% of the time. What makes or breaks a trader’s strategy is his/her ability to take a loss. Limiting your losses using a stop and/or a hedge allows a trader to minimize the losing trades while allowing the winning trades to run wild. This allows a trader to make big profits and small losses, thereby making a consistent profit. To learn strategies on minimizing losses in the stock market, visit this article!
4. Fundamentals don’t matter
A trader is simply concerned with the supply and demand of the stock. A trader’s ultimate weapon are the stock charts which tell the trader about potential upside or downside move in the stock. So, it doesn’t matter whether a company has good fundamentals or bad fundamentals because the trader is not concerned with the business model of the company. The only thing which matters is the movement of the stock as per the stock chart. As long as the price of the stock goes up, a trader in the long position will make money regardless of whether the company had a bad quarter or whether the company is close to bankruptcy. The only thing which matters is the demand and supply of the stock itself, not the underlying asset. This is because (despite popular beliefs) the stock price moves based on demand and supply, not based on fundamentals. To learn more about why stock prices don’t move based on fundamentals, visit this article!
5. Avoid stocks which don’t give an exit
Some stocks (generally penny stocks) can get easily manipulated by big funds which makes it very difficult to predict their movement. To learn more about why penny stocks fluctuate a lot, visit this article! Many new traders get enticed by such stocks in the hopes of making big money quickly. The biggest problem with these stocks is their habit to get stuck on a circuit (upper or lower depending on the mood of big players). A stock which gets stuck on a lower circuit continuously makes it extremely difficult for a trader to exit his/her position. Since trading is all about a quick entry and exit from a trade, this makes such stocks a poor candidate for stock trading. Avoiding circuit stocks and choosing only liquid stocks for trading will allow a stock trader to exit the trade without any problems. To learn more about why liquidity is important in stock trading, visit this article!
6. No single trade will make you rich
Trading is not a get rich quick scheme. Just like any other profession, trading involves regular accrual of small profits to become rich. Many new traders enter stock trading thinking that it is all about – go big or go home. Almost all such traders take huge risks and eventually end up losing all of their money. Stock trading is like a marathon, not a sprint. Every trader will eventually become rich as long as he/she keeps on winning small battles regularly. Betting big on a trade is the easiest way to get kicked out of the stock market forever.
7. Accept mistakes
Accepting mistakes is a big part of a trader’s journey. Stock trading is not about predicting the stock market, rather about the analysis of the stock charts. Not even the most famous investors or traders can predict the stock market. To learn about why nobody can predict the stock market, visit this article! A trader regularly makes decisions based on stock charts, only for those decisions to be proved wrong within a few days/weeks. Trends reverse, breakouts fail and stock charts change within minutes which makes no technique in trading a fool-proof technique. A trader should always be prepared to accept his/her mistake and exit a bad trade.
8. You cannot have all the profit in the world
Every trader finds out that the stock market is filled with regrets. Sometimes you book profits too early. Or sometimes the stock reverses right after hitting your stop loss. Such regrets are common in the life of a stock trader because nobody can have all the profit in the world. A stock trader should be focused on making regular small profits rather than making the most profits available. Nobody can buy at the bottom and sell at the top. Anybody who claims to do that is either lying or incredibly lucky!
9. Adapt to the market conditions
The stock market doesn’t move as per the trader, the trader moves as per the stock market. A simple quote which is famous amongst traders is – Market is supreme. It is a trader’s responsibility to take the trades in the direction of the stock market. It is foolish to expect that the market’s movements will be decided on the trades which you take, rather it is the other way around. Always adapt to the market conditions. A successful trader takes a long position in a rising market and a short position in a falling market. Only amateurs decide to go against the market conditions, eventually losing all of their money.
10. News is your biggest enemy
A successful stock trader simply follows the stock charts. Many traders find themselves in a dilemma where the stock chart is indicating a potential bull run but the news is indicating that the company is going through hardships. Remember that a stock trader doesn’t really care about the fundamentals of the company, rather only cares about the price of the stock. Always filter out the news and focus only on the stock charts. Trading based on news is the biggest mistake which newbie traders make. To learn more on whether you should trade based on news or charts, visit this article!
11. There is no such thing as a lifetime opportunity
Stock market is always full of opportunity for a trader with the right mindset. Many new traders make the mistake of thinking that the opportunities are few and losing a good opportunity is equivalent to missing a lifetime opportunity. This fear makes traders jump into trades with complete disregard to their trading system. Running after stocks due to the fear of missing out a golden opportunity is the biggest mistake which a stock trader can make. There are and will continue to be new opportunities in the stock market for traders to make money.
12. Patience is key
New traders think that stock trading is all about making a quick profit without having to wait like an investor. Stock trading involves quickly buying and selling stocks with a timeframe ranging from a few minutes to a few weeks. However, a lack of patience can completely ruin a trader’s strategy. New traders think that the stock will start to move as soon as they enter the trade & end up getting frustrated when the stock just refuses to move. Holding the stock for a set period of time (ranging from a few minutes to a few weeks) with patience is an absolute must for a stock trader to make consistent profits in the stock market.
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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.
Contact me at investmentabshuru@gmail.com
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