Traders are human and when they undertake anything new – including trading – they come to the table with certain preconceived notions or habits, which I'll refer to as mindsets.  It pays to take advantage of your education and experiences and apply appropriate lessons to any new challenge, including becoming a successful trader/investor.

The problem arises when those mindsets, developed over a lifetime, are in conflict with habits that are required to succeed in the new endeavor.  For some it's a relatively short lifetime of experience and for others it quite lengthy.  Nevertheless, bad habits are difficult to overcome, and that can make it very difficult to succeed as a trader.

I often write about the importance of good risk management and money management.  Someone who has spent years running up credit card debt, living beyond his/her means, or buying things to impress the neighbors obviously lacks the discipline to be careful when managing money.  I'm not suggesting a trader must be frugal.  But trading discipline is not easy for someone who spends carelessly and does not understand the importance of avoiding debt – especially at high (credit card) interest rates.  Being careful with trading dollars and getting your money's worth from the commissions and fees you pay contributes to success.  The frivolous spender may have a difficult time with that aspect.

On the other hand, it's possible that the too frugal trader may not be willing to invest money in insurance or in making adjustments.  It's certainly not frugal to take excessive risk, but an inclination to watch every penny can get in the way of trading decisions.  Maybe this is one reason why so many who advocate a frugal lifestyle also prefer passive investing.

Unless you own a portfolio of very conservative positions, occasionally (more often for aggressive traders) you find yourself in a risky situation.  It's far better to make decisions based on common sense, previously made plans, and the ability to think well under pressure.  Individuals who are accustomed to being ruled by their emotions are not going to do well under these conditions.  Thus, if you have a  mindset that allows those important, spur of the moment, decisions to be made when emotions are in control, that's deleterious to your chances of winning the trading game.  Those who have their emotions under control, are far better placed to make a good decision under pressure.

Do you have the mindset that allows sloppiness in your daily life?  Can you overcome it and become more disciplined when trading?

Do you think of trading as dealing with Monopoly money?  Is trading a game to you?  Or do you have the mindset of a gambler?  That's not the mindset of a serious trader who understands that taking big risk, and losing, can be ruinous.

Do you have an understanding of where your comfort zone lies and the importance of trading within that zone?  That's a positive mindset because it makes it easier to know when to take your profits or adjust a position.

My suggestion is simply to be aware of the recommended characteristics of a successful trader (you can find various opinions online) and be certain that you are aware of any habits that are in conflict with those desired traits.  Being aware is the first step towards not allowing those habits to interfere with your quest.


13 Responses to Mindsets

  1. Marty 10/21/2009 at 11:15 AM #

    Great topic, couldn’t agree more. Unfortunately, I feel like a lot of people who’d like to trade never even make it to this stage of self-examination. Hoping to find the holy-grail of indicators or strategies that will never lose is a lot easier than taking the time to decide which strategy fits the individual AND trying to improve personal risk management. It’s hard work!

  2. Mark Wolfinger 10/21/2009 at 11:42 AM #

    That’s it. Hard work. Obviously there are many investors who take some time out of their lives to manage their investment portfolios.
    Others go the passive investing route – which is ok, but only up to a point. Ignoring risk and assuming all will be well – that’s a big mistake.
    But anyone who wants to trade for a living has a difficult task ahead. There are many bloggers with great ideas, and someone willing to put in the time and effort can find much excellent advice. Sadly, there is trash to be avoided. And scammers to avoid.
    The potential trader must educate him/herself for the job. Most don’t recognoze that need.

  3. Dave 10/21/2009 at 11:58 AM #

    Really great post! Good to know yourself before slinging precious account money.
    It’s been said about trading the market; “If you are trying to self destruct– you’ve picked the perfect medium”.

  4. Mark Wolfinger 10/21/2009 at 1:00 PM #

    I like your quote.

  5. Steve 10/21/2009 at 3:33 PM #

    I have noticed the RVX is always higher than the option implied volatility stat for the IWM by a couple of points. Is this because the RUT index is 10X the amount of the IWM?

  6. Rob 10/21/2009 at 7:34 PM #

    I enjoyed this post, Mark.
    One of the things I’ve had a difficult time with is taking a loss. I’ve learned quite a lot on your blog and in “Rookies”, and since starting to pay careful attention to position sizing I’m not as afraid of losses as I used to be. Sure, it’s still not *easy* to take a loss, but it’s easier to accept when it’s a small loss.
    I have also found it valuable to have a written plan for each trade. You read about it a lot, but until I started doing it I wasn’t convinced it was necessary. Now I can see that it really helps me clarify my objectives for a given trade.
    I’d be curious to hear what other investors have found works well with respect to the topic of this thread!
    Thanks, Rob

  7. Mark Wolfinger 10/21/2009 at 7:47 PM #

    No Steve,
    In theory these two items trade with (alomost) identical volatility. the correlation is not 100% because IWM attemps to exactly mimic RUT but only comes ‘very close.’
    I’ve never taken the trouble to compare the IV of these two.
    The RVX data comes from the implied volatility of the options and for some reason RUT options have the higher volatility. Don’t know why. Sorry.

  8. Mark Wolfinger 10/21/2009 at 7:51 PM #

    If you ignore the initial price for a given trade, you will not be thinking in terms of profit or loss. Instead you will only consider future potential profit vs. risk. In other words: Do you want to own this position today, at today’s prices?
    That’s truly very effective. If you can do it. It’s a special mindset.
    The written plan is a good idea. But options are not stocks and as time passes, there’s a good chance the plan will change. That’s ok. While you may want to stick with the basic plan, time makes a big difference when trading options and you must be flexible enough to ake a new plan.

  9. Jesse 10/21/2009 at 10:44 PM #

    I think trading successfully is 90% a mental game.
    One trading adage is: “Cut your small losses quick, and let your profits run”.
    After reading Mark’s “Rookie Guide”, I started trading stock options in February this year with a break of 2 months in July and Aug for summer vacation. My account so far has achieved stellar performance (my standard). I’ve analyzed my portfolio and figured out that it’s because of the conservative approach that Mark preaches in his book plus the fact that I’m able to sit tight and let most(over 95%) of the options expired worthless.
    Having said the above, my futures trading is not satisfactory because I always take small losses and small profits, in the long run, it’ll be death by mathematics. I just don’t know why I can’t use the option trading mentality and apply it to futures trading. Maybe someone can enlighen me in this aspect.

  10. Mark Wolfinger 10/22/2009 at 7:10 AM #

    I would guess that you see much greater risk when you own a futures position. If true, that’s one rreason for acting quickly.

  11. Jesse 10/22/2009 at 6:25 PM #

    What you said is true as I just daytrade futures with no position held overnight, so I always have the urge to close out my positions very quickly. In contrast, equity option trading makes me feel very “comfortable” and I can trade it with peace of mind.

  12. TR 10/22/2009 at 9:10 PM #

    Great post Mark.
    I have learned a lot from your consistent focus on risk management. I am getting better but there is still more progress to be made in my mindset as I learn to trade Iron Condors profitably. I agree with your idea of ignoring your initial price when considering whether to make an adjustment.
    I have found it to be valuable to watch the risk curve (I use risk navigator on TWS – Interactive Brokers) for my options portfolio and adjust when it gets too steep. I am starting to grow acustomed to really enjoying the “peaceful feeling” when I am in the middle of the flat section of the curve.
    The part I am still working on is avoiding the death trap of “hoping” that the market will move in my preferred direction when I am at a steep section of the curve. Even though I fully believe that I don’t have a clue which way the market will move tomorrow I still find it hard to adjust by paying out cash – instead on hoping for a reversal.
    Thanks again for the consistent coaching on the importance of risk management and “living to trade another day”

  13. Mark Wolfinger 10/22/2009 at 9:33 PM #

    Everyone hopes or roots for somthing good to happen. There’s nothing wrong with doing that. The problem comes when you learn to depend on hoping and ignore alternatives.
    Sometimes paying out that cash earns an extra profit. Not that often, but often enough to make it easier to buy.
    I completely understand that premium sellers do not like buyng anything. But for my comfort zone, that’s not appropriate. It’s far less risky (yes, less profitable) to own insurance.
    Good trading