The Winning Mentality
Editor’s Note: This is an excerpt from Toni’s very readable book, A Beginner’s Guide to Day Trading Online.
Experts say good sex is 10 percent in your body and 90 percent in your head.
Believe it or not, good trading evolves from the same ratios — about 10 percent methodology and 90 percent mental discipline! You can study charts and indicators until your eyes cross, but unless you develop a specific mindset to guide your trades, you’ll be walking a tightrope without a safety net!
To start with, let’s establish two, etched–in-stone commandments to live by the rest of your trading life.
- The First Commandment: Protect your principal
- The Second Commandment: Trade to trade well (not to make money)
Do they sound too simple to be true? Trust me, they’re not! They’re much easier promised than accomplished, but they can be mastered. Virtually everything you learn in this book points back to these two commandments. If you keep them uppermost in your mind, and implement them into every trade, you’ll travel the road to riches!
The First Commandment: Protect Your Principal
Successful professionals in occupations the world over use tools to accomplish their goals. Whether intangible, such as knowledge and discipline, or tangible, such as stethoscopes, violins, or race cars, these tools are cared for, even cherished.
Dr. C. Everett Koop doesn’t drag his stethoscope on the floor behind him as he makes hospital rounds, Stradivarius didn’t toss his violin out in the rain, and Michael Andretti doesn’t push his racing car into the path of an oncoming train.
As a successful trader, your tools consist of market knowledge, mental and emotional discipline, and your trading account. Protect the money in your trading account at all times. Don’t abuse it, treat it carelessly, or allow others to take it from you. This money is your most cherished tool, and you must guard it with your life!
“Yeah, yeah, I already know all that stuff,” you reply. “You’re oversimplifying. You’re going overboard with your explanation.”
Am I really? Surely we’ve both watched television programs that tell the unhappy stories of new day traders who have lost all their money, and worse. I bet we’ve both heard the same statistics, between 80 and 90 percent of all traders crash and burn! As you read this, traders somewhere in the world are “chasing” a stock, ignoring their stops, holding losers, overtrading, taking home dangerous or oversized positions, and buying against a downtrend. Translation? They are treating their precious tool, their trading capital, recklessly!
I work with new traders every day who swear they protect their principal, and in the next breath, abuse it by jumping into a careless trade. They get caught up in the thrill of the moment, the excitement of a running stock, the euphoria of buying when everyone else does. Hey, I’ve been there, too. Took pictures, bought the T-shirt, and lost money!
Even if you avoid all unnecessary risks, a percentage of your trades will lose money. Don’t add to these by careless trades, or you’ll wake up one morning with assets that add up to pocket change.
True trading professionals, who rake in profits of five, six, even seven figures a year, protect their accounts like a mother tiger protecting her cub. They trade cautiously. They look at occasional good-trades-gone-sour as routine business expense. And they don’t compound them with losses due to carelessness.
Jimmy Rogers, one of the shrewdest investors of our time, frequent guest on CNBC, and now retired and teaching at Columbia University Graduate School of Business, says in Jack D. Schwager’s Market Wizards,
One of the best rules anybody can learn…is to do nothing, absolutely nothing, unless there is something to do. I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up.
Rogers, like other financial giants, amassed a fortune by protecting his principal. He knows specific signposts that point to a high probability of success and has the mental and emotional control to wait until they appear. You will, too.
Let’s talk about positive, mental devices you can use to protect your principal.
- During the trading day, repeat to yourself over and over, “At all times, I protect my principal.” Say it out loud. Don’t just murmur it, shout it with enthusiasm! Sound crazy? Try it. It works.
- Before you click on the “buy” button, ask yourself:
- Why am I entering this trade? Does my trade coincide with the current market trend? Do primary market indicators support my decision?
- Is my entry point technically perfect?
- Do I have a rational, thought-out game plan? Where’s my sell/cover stop if my trade goes sour? Where’s my proper exit point if it performs well?
- What time of day is it? (Certain time slots during the trading day almost guarantee a trade’s failure or success. You’ll learn these times in Chapter 5.)
With practice, you’ll soon be able to answer the above questions in five seconds or less. If you’re answers are quick, concise, and positive, then the trade should be as close to a “sure thing” as possible. If you fumble or over-justify even one of the answers, reconsider placing the trade at all.
Please take a personal oath right now to protect your principal. Copy the commandment and tape it to your monitor. Tape another copy on your bathroom mirror and refrigerator door. Write it on the back of your hand — whatever it takes to etch these words onto your brain and every fiber of your being!
Treat your trading account as any professional treats his or her tools, with concern and respect. Protect it at all times, and don’t expose it to carelessness or neglect. If you care for it properly, it will care for you, and multiply at the same time!
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