5 Habits of Winning Traders — No. 1: Money Is Not Important
You check your phone. There’s a new notification telling you that your stock just went up by 2%.
Awesome! You think, and you go on about your day.
A second notification informs you that the stock just dropped 3%.
Great! You think sarcastically.
Maybe I should have waited before buying that stock.
Maybe I should have put less money into it.
You start to get anxious and stressed out. Your mind goes through all the negative outcomes that may come from this one stock not performing how you expected it would.
You check your phone again, just in case you didn’t hear the “ping.” Maybe there was a new move in the stock.
A few minutes later, you check again, and again — just to make sure nothing new came up.
The obsessive market-move-checking behavior is similar to hypochondriacs checking in with their health care provider.
Hypochondriacs get worked up when they notice even a minor physical or psychological symptom.
And here’s the kicker from Wikipedia…
“Hypochondriasis … involves a hypervigilance of situation of the body or mind and a tendency to react … in a negative manner that is further debilitating.”
Hypervigilance, stress and anxiety have a similar debilitating effect on investors, not just hypochondriacs.
Thirty years ago, a research psychologist identified this situation.
He discovered a belief that helps investors counteract the negative effects, and a plan that helps them succeed.
And it’s a plan that can help you get rich.
5 Beliefs Among Winning Traders
Dr. Van K. Tharp came from the Health Sciences Center at the University of Oklahoma.
He studied the relationship between stress and human performance.
He became enamored by the psychology of winning, and he used his knowledge to open a consulting business for traders and investors.
From his work with traders, Dr. Tharp identified five market-based beliefs common among winning traders.
- Money is NOT important.
- It is OK to lose in the markets.
- Trading is a game.
- Mental rehearsal is important for success.
- They’ve won the game before they start.
I’ll dive into each one of these beliefs in articles that are to follow.
Today, let’s focus only on the winning belief at the top of the list…
Dr. Tharp found that successful traders believe money is not important.
That implies there’s a problem in believing money is important.
Think about the axiom that advises traders to cut losses and let wins run…
That’s hard to do when money is too important to an investor.
Our human tendency is to preserve gain and avoid loss.
But our emotional understanding doesn’t work well in the markets, where our natural response to risk is often counterproductive … even debilitating.
We stress over taking a loss.
We stress over preserving a gain.
Our risk-averse instincts keep us stressed. And that leaves us with wins that are too small and losses that are too large.
When we do take a loss, we stress about placing new trades.
When we do take a gain, we stress about the money we left on the table when the trade continues in our favor.
All because we believe our money is important.
Investors and traders need to believe money is not important. And they need a plan to avoid the debilitating effects of risk.
Trust Your Plan — Don’t Stress Over Money
Dr. Tharp found that successful traders trust the plan.
The plan, for a successful trader, is a system of rules and strategies.
The most important thing, then, is to follow and trust the system.
A system takes much of the stress out of risk taking because it is focused on the process rather than the outcome.
A system turns a decision of “should or shouldn’t” into a decision of yes or no.
This doesn’t mean ignore the outcome.
After all, a system’s rules and strategies must bear fruit.
Otherwise, an investor is merely substituting an emotional fixation with a systematic one — trading one losing proposition for another.
To be a better trader or investor, stop letting your money stress you out. Keep your eyes on the path to the prize.
That path leads many investors to look for a great system.
To that end, stay tuned for an announcement from Matt Badiali and me in the coming weeks!
I’ll be back next week to explain why it is OK to lose in the markets … and how that separates winning and losing investors.
Senior Analyst, Banyan Hill Publishing