You are absolutely right that the right mindset can go a long way in getting you success in the stock markets as a trader and as an investor. The battle for profit in the market is won in the minds of the investor or the trader. If you look back at the traders who end up in losses, it is less to do with the volatility of the markets and more to do with the wrong approach or the wrong mindset. Let me cover some of these mindset issues.

Markets are always smarter than individual traders

This should be the underlying theory for any trader. When you expect a stock or the index to go up and instead it goes down, then the market is giving a message. It is a message for you to rework your assumptions in the trade since you may be missing out something. Markets represent the collective information and wisdom of thousands of investors. The smart trader is humble enough to accept that the market is always right and willing to craft their trading strategy accordingly. Markets can be inefficient at times, but don’t try to outsmart the market.

The stock market can move up and can also move down

This sounds simple; but it is not. Traders are generally obsessed with trading on the long side (buying). Irrespective of whether you want to trade for a few days or for a few months, the preferred direction is always to buy. If you look back at the markets over the last five years, then most of the positive returns would have come from 3 or 4 spurts in the market. For long periods of time, the market tends to stay range bound or is headed down. A good trader should be agnostic to long and short trading depending on the opportunities.

Risk your profits and then your capital

Rather risk the profits you have made than risking your core capital? Obviously, you don’t bet your house on a single speculative trade. That is not the way it works. As a trader, you must be making profits along the way. As a trader, mentally separate your capital from your profits. Get into the habit of taking higher risks only out of your profits and not out of your core capital. Even if you lose part of your profits, it is something you can handle and is better than losing part of your capital.

Hold losses short and hold profits long

You got to make the best of a call that is working in your favour. Even the best of investors or traders don’t always get their trades right. If you get 7 out of 10 trades right then you are extremely lucky. What differentiate a successful investor is that they hold on to successful trades much longer. Of course, they will do it with a trailing stop loss but that is more specific in nature. What is more important is to cut losses fast. If you bought a stock and the stock corrects, the normal tendency is to wait a little longer or to average positions. This is like being wrong twice. Greater investors focus on this point.

Never let a stop loss make you an investor

What does this really mean? You buy a stock and when the prices go against you start behaving like investors. Don’t become an investor by default just because your trade went against you. That is when you should just trigger the stop loss and move on. It is not your job to decide whether you can afford to hold or not. As a trader, you got into the trade with a short term view and you must get out if the short view does not hold. What happens later is not your business.

You are judged by your last trade so don’t gloat over past success

This is harsh but it is awfully true. Like companies are as good as their last quarter or an employee is as good as the last appraisal; a trader is as good as the last trade. The moral of the story is that you must not gloat over successful trades or get complacent. Profits and losses are part of the trading game. Just focus on your last trade and draw the lessons. That is how you will be judged and that is how you should judge yourself! You can’t get it wrong all the time and you can’t get it wrong all the time.