The Mental Game of Trading

1. Emotions are signals, not problems to be suppressed

Emotions aren't evil—they're signals to use and learn from.

Reframe your perspective. Contrary to popular belief, emotions in trading are not inherently bad. They serve as valuable signals pointing to underlying issues that need to be addressed. By viewing emotions as indicators rather than problems, traders can gain insights into their mental game and make necessary improvements.

Understand the role of emotions. Emotions fuel performance and provide energy for decision-making. Even negative emotions like anger can be beneficial when channeled properly. The key is to maintain the right balance and stability of emotions to consistently perform at your best.

Avoid common pitfalls. Many traders make the mistake of trying to control, suppress, or ignore their emotions. This approach is counterproductive and can lead to:

• Increased emotional volatility
• Missed opportunities for growth and improvement
• Inability to access valuable intuitive insights
• Reduced overall trading performance

2. Map your emotional patterns to understand triggers and reactions

You can't stop what you can't see.

Create a detailed map. To effectively address emotional issues in trading, it's crucial to develop a comprehensive understanding of your emotional patterns. This involves identifying triggers, thoughts, emotions, behaviors, and trading mistakes associated with different emotional states.

Use a systematic approach. Follow these steps to create your emotional map:

1. Pay close attention to your emotional reactions over several weeks
2. Document triggers, thoughts, emotions, behaviors, and trading mistakes
3. Organize your observations into a scale of increasing severity (1-10)
4. Separate mental/emotional aspects from technical aspects of trading
5. Regularly review and update your map as you gain new insights

Benefits of mapping. By creating a detailed emotional map, you'll be able to:

• Recognize early warning signs of emotional escalation
• Intervene before emotions significantly impact your trading
• Gain insights into the root causes of your emotional reactions
• Develop more effective strategies for managing your mental game

3. Identify the root causes of your mental game issues

We cannot solve our problems with the same thinking we used when we created them.

Dig deeper. Many traders focus on surface-level symptoms rather than addressing the underlying causes of their mental game problems. To achieve lasting improvement, it's essential to uncover the root causes of emotional and behavioral issues in trading.

Use the Mental Hand History tool. This five-step process helps traders analyze and resolve mental game problems:

1. Describe the problem in detail
2. Explain why it makes sense that you have this problem
3. Explain why the logic in Step 2 is flawed
4. Come up with a correction to that flawed logic
5. Explain why that correction is correct

Address common root causes. Some frequent underlying issues include:

• Unrealistic expectations
• Misunderstanding of market dynamics
• Flawed beliefs about trading or personal abilities
• Unresolved personal issues affecting trading performance
• Gaps in technical knowledge or strategy implementation

4. Greed is often a symptom of other underlying problems

Greed is a basic part of animal nature. Being against it is like being against breathing or eating.

Understand the nature of greed. In trading, greed is often a manifestation of other emotional issues, such as overconfidence, fear, or anger. Recognizing this can help traders address the true source of their problems rather than focusing solely on controlling greed.

Identify common signs of greed:

• Forcing mediocre trade setups
• Holding winning positions too long
• Increasing position sizes without proper risk management
• Chasing the market price up and down
• Obsessing over potential profits and missed opportunities

Address underlying issues. To effectively manage greed in trading:

1. Examine the root causes of greedy behavior
2. Develop a clear understanding of your edge and risk management strategy
3. Implement rules and guidelines to maintain discipline
4. Focus on process-oriented goals rather than solely on profits
5. Cultivate a long-term perspective on trading success

5. Fear in trading: Recognize and address its various forms

We can easily forgive a child who is afraid of the dark; the real tragedy of life is when men are afraid of the light.

Understand different types of fear. Traders may experience various forms of fear, including:

• Fear of missing out (FOMO)
• Fear of losing
• Fear of mistakes
• Fear of failure

Recognize common signs of fear:

• Hesitation in entering trades
• Exiting profitable positions too early
• Avoiding high-probability setups
• Overanalyzing market data
• Seeking excessive confirmation before taking action

Develop strategies to manage fear. To overcome fear in trading:

1. Identify the specific type of fear you're experiencing
2. Examine the underlying beliefs or experiences contributing to your fear
3. Challenge and reframe irrational thoughts
4. Focus on risk management and proper position sizing
5. Gradually expose yourself to fear-inducing situations in a controlled manner
6. Cultivate a growth mindset and view mistakes as learning opportunities

6. Tilt: Understand and manage anger in trading

Anger is a bad advisor.

Recognize tilt. Tilt refers to a state of emotional frustration or anger that leads to poor decision-making in trading. Understanding the nature of tilt and its triggers is crucial for maintaining emotional control.

Common signs of tilt:

• Overtrading or revenge trading
• Increasing position sizes after losses
• Ignoring risk management rules
• Fixating on recent losses or missed opportunities
• Experiencing physical symptoms like increased heart rate or muscle tension

Develop a tilt management strategy:

1. Create a detailed map of your tilt patterns and triggers
2. Implement a "stop-loss" for your emotional state
3. Practice mindfulness and self-awareness techniques
4. Develop pre-planned responses to common tilt scenarios
5. Take regular breaks and step away from trading when necessary
6. Analyze tilt episodes after the fact to identify areas for improvement

7. Develop stable confidence for consistent performance

Confidence is a feeling, which reflects the coherence of the information and the cognitive ease of processing it.

Understand the nature of confidence. Confidence in trading is not a fixed trait but a dynamic state that can fluctuate based on various factors. Developing stable confidence is key to consistent performance.

Recognize signs of overconfidence and lack of confidence:

• Overconfidence: Taking excessive risks, ignoring warning signs, feeling invincible
• Lack of confidence: Hesitation, second-guessing decisions, avoiding opportunities

Build stable confidence:

1. Focus on process-oriented goals rather than solely on outcomes
2. Maintain a detailed trading journal to track progress and successes
3. Continuously improve your knowledge and skills
4. Develop and stick to a well-defined trading plan
5. Practice self-compassion and avoid harsh self-criticism
6. Regularly review and update your strengths and areas for improvement
7. Seek feedback and support from other experienced traders

8. Discipline: Build habits and routines for trading success

Talent without discipline is like an octopus on roller skates. There's plenty of movement, but you never know if it's going to be forward, backwards, or sideways.

Cultivate discipline. Discipline in trading involves consistently following your trading plan, managing risk, and maintaining focus. It's a skill that can be developed and improved over time.

Common discipline challenges:

• Impatience and overtrading
• Boredom leading to poor decision-making
• Distractibility and lack of focus
• Procrastination on important trading tasks
• Laziness in maintaining trading routines

Strategies for improving discipline:

1. Develop a clear, written trading plan and review it regularly
2. Implement a pre-market routine to prepare mentally and emotionally
3. Use checklists to ensure consistent execution of your strategy
4. Set realistic, achievable goals and track your progress
5. Practice mindfulness and meditation to improve focus
6. Create a distraction-free trading environment
7. Regularly review and analyze your trading performance
8. Gradually increase the duration of focused trading sessions

9. Correct problems in real-time using a four-step process

Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.

Implement a real-time correction strategy. To effectively address mental game issues as they arise during trading, follow this four-step process:

1. Recognize: Identify when a problem has been triggered using your emotional map
2. Disrupt: Use techniques like deep breathing or physical movement to interrupt the pattern
3. Remind: Recall the correct thoughts or behaviors you want to implement
4. Refocus: Direct your attention back to your trading process and strategy

Practice and repetition. Consistently applying this process will help:

• Strengthen your ability to recognize and manage emotional reactions
• Develop new, more effective mental habits
• Improve overall trading performance and consistency

Overcome challenges. Be prepared for initial difficulties and setbacks when implementing this strategy. Persistence and regular practice are key to achieving lasting improvements in your mental game.

10. Embrace the learning process and continually improve

Truth—more precisely, an accurate understanding of reality—is the essential foundation for producing good outcomes.

Adopt a growth mindset. View trading as a continuous learning process rather than a fixed set of skills. Embrace challenges and setbacks as opportunities for growth and improvement.

Apply the Inchworm Concept:

• Recognize that your trading skills exist within a range (A-game to C-game)
• Focus on improving both your best and worst performances
• Gradually expand your range of competence over time

Strategies for continuous improvement:

1. Regularly review and update your trading plan
2. Seek feedback from mentors or experienced traders
3. Stay informed about market developments and new trading techniques
4. Experiment with new strategies in a controlled, low-risk environment
5. Maintain a learning journal to track insights and progress
6. Attend trading seminars, workshops, or courses to expand your knowledge
7. Practice deliberate, focused improvement on specific aspects of your trading

By embracing the learning process and consistently working to improve your mental game, you'll be better equipped to navigate the challenges of trading and achieve long-term success.

Last updated: January 22, 2025