I’ve been thinking a lot about the mental aspect of trading recently. Why? Because markets have been more volatile in the past two months than they have in years.
It has tested my ability to stay focused, let go and remain enthused about trading after a loss.
This reminds me of a quote by former heavyweight boxer Mike Tyson: “Everybody has a plan until they get punched in the face!” Or in this case, the pocketbook — both hurt.
“...markets have been more volatile in the past two months than they have in years. It has tested my ability to stay focused, let go and remain enthused about trading after a loss”
Case in point: Around mid-April, I had been looking for the US dollar to continue its strength and so took out a short position on EUR/USD and AUD/USD.
The timing of my entry was horrible. Not that my reasons and analysis were wrong or sloppy, but the market simply did not see it the way I did – and the markets are always the final judge.
From a technical perspective, the rally in the US dollar [DXY] was poised to continue and I also thought that the COVID-19 situation would continue to create a global shortage of dollars and drive the value higher.
Nonetheless, these trades were torture. Each day there were more unrealised losses, prompting self-doubt.
Yet after taking a step back and re-evaluating, I was able to add to the trades at more favourable prices when they started to move in my favour.
Ultimately, the trades worked out and the feeling of vindication was wonderful.
Collin Henderson, author of Master Your Mindset, gives good advice on handling a situation like this: he believes in focusing your energy on the process, not the outcome. “Do the work, trust your decisions, and let go,” he says.
The best traders trust their process and execute it faithfully. They don’t shoot for perfection. A 60% win can mean success. It may be helpful to remember a Hall of Fame baseball player is successful 30% of the time.
“The best traders trust their process and execute it faithfully. They don’t shoot for perfection. A 60% win can mean success”
I have found there are some strategies that help. For instance, a mountain bike ride helps to clear my head and gets me away from the screens. That way, I am calmer and less likely to close a trade prematurely.
I also try to remember that when a trade is closed, win or lose, it is over. I don’t mistakenly bring yesterday’s loser or winner into today.
Furthermore, it’s important to measure progress in weeks or months, not trade to trade. Finally, you should know your end goal and practice visualising it. I set a target that I want to reach by the end of the year and I keep focused on that.
Dave Floyd has two decades of experience and expertise in fundamental and technical analysis. He is the founder of FX research and analytics firm Aspen Trading Group and co-founder of Merge Capital Management.