What is the optimal mindset to be in while trading? (Trading Psychology)

What is the optimal mindset to be in while trading?

I posed this question to the trading community and you can see many savvy responses to this essential question here.  If you do not get this part right, then you will never reach your trading potential.  This might keep you from moving from losing money to becoming a Consistently Profitable Trader.  This might keep you from moving from Consistently Profitable Trader to 7-Figure-a-Year producer.  Worse yet this might cause your trading failure.

There is nothing more disappointing than your failure to reach your potential.  You should not, no cannot, accept being less than you can be.

From my seat, as the Co-Founder of SMB Capital- a proprietary trading desk in NYC, the optimal trading mindset is:

  • Open-minded
  • Excited for the trading opportunity
  • Calm
  • Focused

Open-minded

Open-minded means to intake the data the market is providing and process it without bias.  For traders our data is the price action.  For example, if we are long $AAPL and the price action consists of heavy selling, then there is heavy selling in the market.  Contrast this with the trader who is long $AAPL, sees heavy sell action in the name, and concludes this selling has to end soon because the company is awesome.  The price action is the price action.  The open-minded trader observes the price action and decides whether to make a trade decision as a result.

(See also: The Trap of Recency Bias)

Shark is the all-around best trader on our desk.  Frankly, he is one of the best active traders on the Street.  And he is still getting better. His kryptonite as a trader is trading his opinion.  Here is this elite active trader with years of trading success, and myriads of trading wins in his trading career, who repeatedly loses, and loses too much, when he stubbornly sticks to his bias.  When he shares his Daily Report Card with Dr. Steenbarger, his Team, and myself after he underperforms almost always it is because of the same issue- trading his opinion.  And he regrets doing so and creates a clear plan to wait until the price action is confirming his opinion.

This is not to say that he does not develop conviction in an idea that often helps him win.  It is to say that after he develops a thesis, his worst trading comes when he fights the price action that differs from his thesis.  It is to say this best trading comes after he develops a thesis, and that thesis is then confirmed by the price action.

Observe the price action and let it tell you what the stock or market or sector is likely to do.

Excited for the trading opportunity

“Nothing great was every achieved without enthusiasm,” – Ralph Waldo Emerson

In March of 2020 many traders experienced their best trading results on our desk. Universally, many of the top performers spoke and emailed and g-chatted about their *excitement* for the up-coming trading session.  They were *excited* for the market to open and for them to pounce on the opportunity present.

(See also: How to crush it (trading) in 2020)

SWang is flat out the best trader on the desk.  It is striking how much better he performs after he gchats in the AM to me about how excited he is for the day’s trading opportunity.  It is almost like there is a printing press linked to the excitement of his AM comments.  The greater the excitement the higher his PnL.  Simply, when he super excited about the up-coming day of opportunity, he crushes it.

When I think about the best trades made at our firm over the last 5 years this has often been preceded by trader talk of excitement about the opportunity.  They couldn’t wait to catch the TLRY short.  They couldn’t wait to hit volatility, when it turned.  They couldn’t wait to hit NKLA.  Now they are excited about the opportunity in the solars.

Now this does not mean they jump into their ideas before the trade is ready.  Just the opposite.  They are excited to wait for the entry.  And then after they see the trade, they see the price action confirming the trade, they enter with massive size.  As an elite trader says, “they swing the bat hard.”

From my seat, I rarely witness monster trading days until after traders are excited about the trading opportunity.

Focused

Focus is one of the most underrated ingredients that feeds elite trading.  You rarely hear talk about the need to be focused for top trading.  You rarely hear trading psychology advice about the need to be focused.  The need to sustain your energy for extended periods of time to catch the real trade.

You hear about not trading on tilt.  You hear about being patient.  You hear about avoiding FOMO.  But again, you rarely hear about the necessity to just focus.

Max is one of the more successful new traders we have trained since we started SMB in 2005.  He starts trading in the premarket and early.  And he is locked in almost all day, save for his pre-determined breaks.  He is chatting and connected to his team discussing trade opportunities.  And then reviewing them and replaying them with his team.  He trades his own account, with these ideas.  He trades a joint account contemporaneously, with his team with these ideas.  He just sits and processes information, discusses this information with his team, and then pounces when a good idea appears.  He is focused.

Dr. Steenbarger introduced our firm to BrainHQ, which you might use as a tool to improve your focus.

Calm

There is a key to being calm.  There one factor one which to focus so you are calm in real-time.

I wrote about this in One Good Trade, you don’t want your traders high-fiving all over the place after good trades.  This it not calm.

And when things go against a trader, you don’t want them banging and screaming and cussing all over the floor.  This is not calm.

There is one trader on our desk who is the most improved trader in 2020.  I have always observed his natural calm on the desk, while he is trading.  Shark has always had this quality about him.  Now maybe these guys are churning inside and never tell me about this, but it sure seems from the outside that they are more chill than many others.

Now before we get to the key factor, let me say that emotion can be used to your advantage.  When a stock or market or both agitate you this could be a signal that they are ready to reverse, for example. And you can learn to tap into this emotion as a trade signal and pounce after agitation.

But we think better when we are calm.  The key is….  we want our heart rate down.  When our hear rate is down we are in the best state to perform.  Good to check in before each trade and check whether your heart rate is down.

SMB Challenge

From my seat, this is what is required to be in the optimal mindset as a trader.  Do not expect anything less from yourself as a trader in each trade.

For the next week, keep track of your  mindset during each trade.  Compare how you do when these four elements are present and when not.  If you do better when these four elements are present, then keep a checklist next to your trading station that reminds you of this optimal trading mindset before each trade.

Prepare yourself to experience the best trading in you.

*no relevant positions

Important disclosures

Mike Bellafiore is the Co-Founder of SMB Capital, a proprietary trading desk, and SMB Training, which provides trading education in stocks, options, and futures. Bella is the author of One Good Trade and The PlayBook. He welcomes your trading questions at [email protected]smbcap.com.