Mindset & Discipline

As I explain in An End to the Bull, to become a successful trader you will need both a
winning mentality and huge amounts of discipline.
The winning mentality means that you want to learn from losing trades because you
HATE losing. You will not just continue trading after strings of losses because you
will want to work out what is going wrong before continuing. To continue trading
after a few losses without stopping for serious reevaluation, is a losing mentality.
We do not trade because trading is exciting. We do not trade because trading is cool.
We only trade if we win at trading. If you are losing at trading but still say you like
trading then you have a losing mentality. Hopefully you are reading this course
because you have been losing but hate that feeling and are driven to improve.
As I have explained, the function of a scalper is more akin to a bookmaker than a
punter and you must be ready to accept this new and very different role.
Many traders like to brag about how they bought the low or sold the top or how they
spotted a trend change. They see sell-side individuals do that on the TV and think that
is what trading is about. An End to the Bull explains why this approach is a huge red
herring that prevents retail traders from succeeding.
If you are keen to spot highs and lows or want bragging rights on picking market
moves then scalping isn’t for you.
Discipline is such a huge topic for traders it is worth a book on its own. There are
many ways a trader can be ill disciplined. For example, trading when tired; trying to
force trades on quiet days through boredom; trading when you aren’t sure your edge
is working that day; continuing to trade even though you are losing; and of course,
running losing trades.
For this course I’m not going to explain all the various ways we can be ill disciplined.
What I want to clearly state though is that to enjoy long term success as a trader you
have to be incredibly disciplined. In particular, as we are looking to make small
profits, you must exit losing trades straight away. We have no tolerance for large
losses or holding losing trades both because of the P+L pain but also because holding
a losing trade prevents us from finding new, winning trades.
With this style I aim for very high percentage win rates – around 80% with a further
10% of trades being scratched (bought and sold for the same price). To achieve this
not only requires robust trading skills but also the ability to analyze and self correctafter losing trades. In this course, I will provide you a checklist for doing this. Many
of the points on that checklist are rarely, if ever, used by retail traders.
Regarding the win rate target, I don’t reduce my targets when I teach retail traders
however a win rate of around 70% can also be very profitable IF your scratch
percentage is higher than your losers. I’ll discuss scratching later in this course.
Further, if you trade a higher tick size contract, you can also achieve good
profitability with a lower win rate but again if your scratch percentage is high. So, I
refer to an ideal profit + scratch percentage of 90%.
For example, US 30 year Bonds have a tick value of $31.25. Let’s say as a retail
trader you pay $3.50 a round trip in commissions. This would mean that a 1 tick
profit is $27.75 while a scratch trade costs you $3.50; a profit is roughly 8 times
bigger than a scratch. Whereas if you trade the eMini S+P contract with a tick value
of $12.50, your profit per tick after commissions of $9 is less than 3 times a scratch.
This means you can afford to have more scratches when you trade contracts with
larger tick sizes.
When I teach retail traders I see literally dozens of different ways they are ill
disciplined. Sometimes they will even say something like ‘I know I should be doing
X but I keep doing Y’. It is very frustrating when I see the same mistakes being
committed week after week even though I might suggest various ways to overcome
the problem. The so-called trading psychologists out there seem to believe they have
ways to improve this aspect of our trading. However, behavioral finance research
suggests that it is extremely difficult if not impossible to change some behaviors.
Certainly my experience suggests that too which is why I don’t believe that everyone
can become a successful trader.
Scalping is a higher frequency style of trading and it is essential we understand the
ramifications of that. Perhaps the most important aspect is that everything we do is
compounded by the frequency. So, small things, small adjustments, small
improvements have big effects because they are compounded sometimes hundreds of
times per year. This is both important and powerful.
Say you are trading US 30 Year Bonds for example and you can with better
discipline, identify that a 1 tick losing trade could have been scratched. The
difference in P+L for this trade is changing a loss after commissions of around $34 to
a loss of just $3. This in itself is a big change (your loss is 10x smaller). However, if
you are now able to make that change everyday i.e. x 250 it is actually worth $8,500
per year to you.This is how scalpers improve their P+L, by making small adjustments. Retail traders
are looking for the multi-thousand dollar trades but professional scalpers are looking
for small adjustments multiplied by frequency. This is an easier method and far more
professional in nature. You will need to make this adjustment; don’t look for home
runs, look for continued and small improvements.
To conclude this section I want to reiterate that you will need to be a very disciplined
and self disciplined person to trade successfully. Myself or others can explain
techniques such as cutting losses quickly or sitting out times when you are unsure but
YOU are the person who has to implement that and implement it consistently.
I sometimes hear retail traders say ‘I don’t trade properly in practice mode because it
isn’t real money’. That is a red flag to me. Do you think top professional sportsmen
have that attitude when they practice? Of course not. They practice properly because
only perfect practice makes perfect. If you practice poorly you will play or trade
There are many similarities between sports and trading. There are many amateur
sportspeople who play golf, shoot baskets on the weekend. However, there is a world
of difference between them and the professionals. It is the same with trading. The
gulf between amateurs and pros is huge.
If you want an example of the mindset and mentality you will require to become a
good professional trader you should think of a top sportsperson. Think, Tom Brady,
Aaron Rodgers, Rory McIlroy, Lionel Messi etc. Think about the intensity they play
at; their love of winning and desire to win; their work ethic; but also their humility. I
don’t think any of these guys have huge egos. Brady in particular is an interesting
case because it wasn’t as if he was noted as a talented player in his college days. He
was a very low draft pick but he worked hard at his game and has become one of the
greatest of all time (I say this as someone who is sick of the New England Patriots yet
I must accept the professionalism of how they go about their work).
It is harder than you might think to work at the intensity and with the focus and desire
of those kind of people but that is what you must aim for.

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