Thinking like a trader might be difficult at first, but once you’ve built the mindset, you can become a successful trader.
A trader’s mindset isn’t something we’re born with, it’s something that’s taught and learned. When you first start out, adopting this way of thinking is crucial to increasing your chances of becoming consistently profitable. That said, here are things you’ll want to change about your thinking to develop the trader’s mindset.
Take calculated risks
Beginning traders tend to have a gambler’s mindset, throwing money into positions and churning their account; successful traders take calculated risks, weighing the risks versus rewards before entering a position. Beginning traders often want to become overnight successes and rush into multiple positions; successful traders only put a position on if — and only if — it fits their style of trading and risk profile.
If you’re not taking calculated risks, but you are putting on multiple positions, and you’re unable to justify why you got into those positions, you’re just gambling.
Develop a plan
Successful traders have a game plan. They plan their trades and trade their plans.
Once you’ve developed a plan and strategy, you’ll have better control of the risk you take, and you’ll avoid acting out of too much excitement in a good situation or too much boredom during slow times. In order to develop the trader’s mindset, you must develop a plan with rules. For example, you might only look to get into a stock based on specific technical indicators, and stop out if you do not see any confirmation.
Work with a mentor
Learn from the mistakes of others, rather than making your own mistakes — with your own cash — and trying to learn from them. Look to work with a mentor with an immense amount of knowledge in the markets, who can provide you with tips and tricks when you’re first getting started. This will help learn the common pitfalls, which should save you time and money.
Developing a trader’s mindset isn’t difficult. You must be disciplined, and having a mentor helps a lot with that. If you take calculated risks, develop a plan and find good teachers, you can develop your trader’s brain in a short period of time. Don’t get me wrong though, it’ll take hard work, dedication and perseverance to become consistently profitable.
Jeff Williams is the lead trader of PennyPro.com. He is a short-term trader of stocks under $10 a share.