Build a strong and reliable trading mindset

Learning to trade, on paper at least, should be relatively straightforward. If you learn the basics, the terminology, the key drivers behind your assets, and common market behavior tendencies, and you should be set for at least a moderately stable performance. However, many forex traders go through all of these steps and still fail to see consistent results, often because they haven’t yet developed a reliable trading mindset that allows them to apply what they know with discipline, emotional control, and consistency.

The issue is that, when it’s your own money on the line, it’s difficult to behave in a rational and predictable manner. Avoiding emotional trading, bad habits, и panic taking over is an entirely separate skill from the practicalities of trading, and is often neglected by newer traders, who are then shocked when they face the real markets.

It’s a difficult problem to deal with and one that’s quite essential to solve. A strong mindset is one of the strongest tools a trader can have in their arsenal.

Education can only take you so far if you choke up once things get tough. This article will deal with that issue, presenting the route traders can take to ensure that their mindset is as strong as their trading strategy.

Recognition: The first step to building a reliable trading mindset

The first step in dealing with any problem is recognising that it’s there. There’s no reason it should be different for issues in your reliable trading mindset.

Most traders, once they realise their performance isn’t up to par, try to shift their strategy, as it’s the most obvious thing that would need fixing. Of course, the problem is often in the execution and not the strategy itself.

Now, spotting when this is happening is the challenge. When you’re trading, it’s easier to focus on the results than what the process is. However, a simple pre-trade checklist can be of great assistance in this regard:

• Is your trade in line with your parameters?
• If not, why are you making the trade?
• How are you feeling upon entry?
• What’s your plan for the exit?
• What is the current market state?

If the answers are negative or unclear, you may be struggling with emotional trading. Furthermore, if you still make the trade despite going through the checklist, or if you find yourself placing a lot of unplanned trades, it may indicate a deeper trading pattern issue.

This means your mindset is off. You need to work on it specifically, as even the best strategy won’t help if you don’t stick to it.

Awareness

What will help you most in your endeavour to improve is awareness. In this context, it has a double meaning.

First, you need to be aware of what you’re doing. Most mistakes come from traders who are on autopilot and are not being conscious about their trading progress. Your actions while trading should be planned, not a spur-of-the-moment thing.

This doesn’t only include your actions but your emotions as well. After you recognise the triggers that prompt your bad behaviour, you need to stay aware of them. Remember what triggered them. Was it FOMO? A particularly volatile market? A small turn in a large position?

Stay aware of these situations and the fact that you may react adversely. Then, you can catch that reaction before it turns into market action.

The second part is awareness of harsh trading truths. Many traders either overexert themselves trying to meet unrealistic expectations or are so frightened by what they expect that they are unable to stay even in winning positions out of panic.

Here are some things every trader needs to realise about building a reliable trading mindset:

• You won’t win every trade
• At some point, you’re likely to suffer a big loss
• You won’t catch every big move
• You can’t follow the whole market
• Unexpected behaviour in the market will sometimes disrupt even crystal-clear setups

These are tough pills to swallow. But if this weren’t true, trading would be as simple as following a diagram and winning every time.

Every trader will encounter these situations sooner or later. They are true even for people who have spent most of their adult lives trading. So, you may think, if these seemingly random occurrences can ruin your trading, how do skilled traders stay level-headed?

The trick is simple: knowing these events can happen means you can prepare both your trading routine and your mental state for them. If you stop looking at every loss as catastrophic and are prepared to handle some variance, you’ll have much less trouble following your tactic.

However, that doesn’t mean you should just let yourself be at the market’s whim. The last part of creating a strong and reliable trading mindset is managing the risk you expose yourself to.

Risk Management

Being aware of your problems will help you work on them with more consciousness, but even if you become prepared to take on more risk and become more confident, it won’t do you much good without a safety net.

If you fail to manage your risk properly, one of two things will happen:

• Your losses will amass, and that creeping feeling of doubt will return
• You’ll approach the market recklessly, and big losses will eat away at your performance

So, what is risk management, and how do traders apply it? Risk management is a simple concept, and it requires you to execute your strategy in a way that maximises upside while preventing downsides.

Core risk management principles every trader ignores at their own expense

A basic measure of risk management is the stop loss feature that all trading platforms have. Stop losses automatically close your losing trade at a predetermined point. This allows you to set a rule for yourself, instead of either intentionally or unintentionally staying in a bad position.

This helps with the two most common trading emotions. Feeling greedy and want to stay in a losing position in hopes of it turning? Your stop loss will prevent that, exiting the position. Fearful that a position may turn and cause a big loss? Set a stop loss, and you won’t lose more than you’re willing to handle.

On a similar note, trailing stops can also help. Instead of being fixed, these follow your position as it goes up and then closes it when it turns. Many traders prefer these because of the flexibility and increased ease of execution.

However, these stop losses aren’t enough. Smart position management, or making sure each position doesn’t risk more than a small portion of your capital. This way, even a big loss or unforeseen event won’t make a large dent in your account, and you’ll be relatively safe from those rare occurrences we mentioned earlier.

Finally, there’s diversification, which has to do with your portfolio. Even if you portion your positions well, if all your positions tend to move the same way, a multi-asset negative shift may cause significant harm to your account. To avoid that, make sure your portfolio includes a variety of assets, preferably in different groups.

The takeaway: How to maintain a reliable trading mindset

While improving your mindset takes time, it is, in essence, a simple task. It consists of recognising your problem, preparing yourself for tough inevitabilities, and then taking action to control them.

These, beyond having a direct effect on your market performance, will also make you feel more at ease, as you’re no longer tumbling around in the dark.

Sticking with this method requires discipline, but if you do stick with it, what was once a real struggle will become a part of your trading routine that you handle with ease.

Disclaimer: This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.