The Psychology Behind Successful Traders: What they do Differently?

Trading psychology is one of the most neglected areas in trading. Traders look for the best system for days, weeks, months. But having a good system is only part of the equation. In order trade with all the available tools, you need to have a good trading system that fits your own personality, a proper money management plan, and you need to understand the psychological barriers that may affect your decisions in the most important occasions.

When you’re trading, it’s normal to have a loss. When that happens, almost every traders think something should be wrong with their system or just say they shouldn’t have entered the trade (even when the system they’re using told them to enter). These shouldn’t be the thoughts that cross your mind. You should take a deep breath, and after a while, take a look at the trade again to understand what was the mistake you did (if any), and what it can teach you so that you can to avoid it in the future.

In trading, it’s pretty hard to achieve consistent profits. Yet, this usually is the goal for most traders. The difference between the few who actually succeed is that they learn from their mistakes. A beginner usually thinks he needs to learn and then trade. What a successful trader does is that he’s learning all the time. And learning from his own experience, from his own mistakes, has an underneath power because it tends to be an invaluable lesson he will never forget. You need to face the mistake not like an error, but as a step to become a better trader.

This is a crucial difference between successful traders and regular traders: successful traders keep learning and adapting to the markets all the time.

Most traders tend to relate trading mistakes to the outcome (usually money) of a certain trade. In fact, mistakes are made when you don’t follow your trading plan, when you break the rules you defined yourself. Just take a look at the two scenarios below to realize there is no correlation between the outcome of the trade and the money:

Scenario 1: Your system gives you a trade.

1. You follow the plan and you have a profitable trade. Conclusions:

Outcome of the trade: You made money, so it’s positive.
What you learned: If you follow the system, you may achieve the goal to have consistent profits.
Emotional side: You gained confidence in your system and in yourself.
Mistakes: You made no mistakes.

2. You follow the plan and you have a losing trade. Conclusions:

Outcome of the trade: You lost money, so it’s negative.
What you learned: You followed the system and you had a loss. It’s part of the trading game; losses should be expected as well as wins. You are proud because, ultimately, you sticked to your system.
Emotional side: You gained confidence in yourself.
Mistakes: You made no mistakes.

3. You don’t enter the trade and it turns out to be a profitable trade. Conclusions:

Outcome of the trade: Since you didn’t enter the trade, it’s neutral.
What you learned: You feel frustrated since you start to feel that you only enter in the losing trades.
Emotional side: You lose confidence in yourself.
Mistakes: You didn’t follow your plan and didn’t enter the trade as you should.

4. You don’t enter the trade and it turns out to be a losing trade. Conclusions:

Outcome of the trade: Since you didn’t enter the trade, it’s neutral.
What you learned: You’ll start to think that you’re better than your system. You’ll begin questioning, even unconsciously, if it’s a good idea to enter when your system gives you a trade.
Emotional side: You start losing trust on your system and become overconfident in yourself.
Mistakes: You didn’t follow your plan and didn’t enter the trade as you should.

Scenario 2: Your system doesn’t give you any trade.

1. You don’t make any trade. Conclusions:

Outcome of the trade: Since you didn’t entered a non-existent trade, it’s neutral.
What you learned: You’re disciplined. You should only enter trades when your system tells you there is one.
Emotional side: You gained confidence in your system and in yourself.
Mistakes: You made no mistakes.

2. You enter in a trade and it turns out to be profitable. Conclusions:

Outcome of the trade: You made money, so it’s positive.
What you learned: You will start to think you don’t need any system at all. After all, you just spotted a good trade all by yourself.
Emotional side: Your confidence in your system is totally destroyed and you are overconfident.
Mistakes: You made a trade when your system didn’t tell you there was one in the first place.

3. You enter in a trade and it turns out to be a losing trade. Conclusions:

Outcome of the trade: You lost money in the trade, so it’s negative.
What you learned: The next time, you’ll be thinking twice before entering a trade when your system said there wasn’t any trade.
Emotional side: You gain confidence in your system.
Mistakes: You made a trade when your system didn’t tell you there was one in the first place.

The most severe mistake you could make is to enter in a trade when your system doesn’t tell you there is one. You’re breaking the rules and you’ll start feeling invincible, you won’t lose anymore. At this time, you can say goodbye to your trader career because you’ll never succeed with this kind of mindset.

If you take a closer look at both scenarios and all the hypotheses, the mistakes were always related to not following your system, from breaking the rules.

Most mistakes can be avoided by taking some time to create your own trading plan. As you realize now, the more detailed the trading plan the better. Your trading plan should include all the criteria your system uses to enter and exit the trades, the time you trade, the currency pairs in which it works better, the stop losses you use and if you should move them or not, and based on which criteria. But it should include more. There should be an entire section dedicated to money management rules. These should include the amount you’ll be using in each trade, whether if you’re using leverage or not and how much leverage, among all other things you can remember.

And this is only the first step of your trading plan. The second step involves following it. There are some successful traders who even have a daily routine before they start trading and when they end the trading day. You may define one for yourself if you think it suits you. An example of a pre-market routine could be looking at the economic calendar to see what news and events are going to be released throughout the day; then, take some time to read the trading plan; take a look at the charts of the preferred currency pairs and time frames; do some breathing exercises to help maintain calm and focused, and only then start the trading itself. This is a simple example of a routine and it doesn’t mean you have to go step by step. You need to discover the things you need to do to stay focused and disciplined throughout the day. What ever works for you should be fine.

As a human being, you’ll make your own mistakes. There’s no question about it. So, what’s the best way to deal with them?

There are many ways to deal with your mistakes, and through time, you’ll discover the one that best serves you. Yet, here’s what I do when I make a mistake:

1 – I try to avoid negative thoughts and believe that every mistake is a chance for me to get better. I try to consider it as a learning experience. It’s not easy, I guarantee, but time will help you.

2 – When I’m feeling calmer, usually after a couple of hours away from the computer, I’ll take a look at the mistake I made and try to find out what actually caused it.

3 – Then, I make a list of all the consequences of the mistake. The bad consequences obviously, but also the good consequences: basically, what this mistake made me learn about myself, my system, everything related to my trading.

4 – This usually occurs on the next trading day: taking action. I try to change my behavior in order to avoid committing the same mistake again.

Trading success isn’t easy or quick. It takes plenty of time, learning from our own experience, working on us and on our system to be a better trader every day. Ultimately, it’s the way how we deal with our mistakes that shapes our future as a trader.