Trader Mindset

Three ways your trading today predicts your financial future


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Goals need to be realistic and attainable. You also need to consider the growth in competing areas of trading. 

If you're making money, how do you know it's not random luck or a bull market? 

I'd love it if everyone could turn $10k into $1,000,000 but the majority who try will lose all their marbles. Those that do will be lucky having been "in the right place at the right time." 

Think of it's this way: if you turned $10k into $1 MM this year playing the lottery, and you had to live your life over 100 times, you'd never replicate doing that ever again. Same for following a set of rules that don't make money [have positive expected value]. You can trade those all day, and you'll do nothing but lose money on average over the long term.

You'd have a better chance of making 20% YoY if you followed a systematized set of rules with positive expected values and traded them over and over. I'm sure Taleb and Ariely have said as much. 

Goals and systems need to be reviewed. You might not have hit your financial goals even though we're in a bull market. That might have to do with your risk per trade, overall risk in your portfolio, or markets to trade. It's possible to have too little risk as well as too much risk. You can trade good rules and lose money. That's bad luck, not a bad system. 

Keep a goal for minimizing losses. Let your upside goals run, like your profits. 

There are forces at work right now that are working to undermine your trading, more so if you are trading intraday or short term. Your trading should evolve with the markets. As Victor Sperandeo said in one of my interviews with him, "the markets are always evolving to try to kill you." He would know - he's been trading since 1968. 

I am continually testing my models to find my blind spots. I'm also looking to see if I can minimize my risk to achieve the same expected return. I'm also looking to make sure that what I trade hasn't become too correlated with each other so that I don't have the effect of a concentrated position in my portfolio.

Don't be reasonable with your upside. Yes, "the market can remain irrational longer than you can stay solvent," but it also means that bull markets can run (while you're long) much longer than you think they can. 

How many people called market tops in 2017? They were all wrong. And these are smart people.

My guess is that they felt the market had gone up enough so the "market callers" published their feelings about risk and what is reasonable to you in the form of a market call. 

Remember, your emotions and psychology effect your attitude, your attitude effects your behavior, and your behavior predicts where you end up in life. From a trading perspective, how and what you trade can predict your net worth over time. 

What you can do in 2018 to positively impact your financial future and net worth:

1) trade less frequently thereby decreasing commissions and slippage;

2) increase your holding periods by letting your winners run longer;

3) diversify across more markets to cut your overall risk;

4) learn to trade a new asset class to impact your reward to risk ratio;

5) rely on a system and stop drawing lines on charts thereby decreasing subjective reasoning in your financial decisions; and 

6) make friends with 5 new people who are leagues smarter than you

 

 

 

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Trader MindsetBy Michael Martin

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