In 2008 I studied the world’s most successful traders for my Master’s thesis.

During this study, I found several common ‘mindsets’ when it comes to trading psychology.

In this lesson I narrow them down to five I have found most valuable in my trading.

By adopting these five mindsets, it will change the way you think about trading, and risk-taking in particular.

The credit for this lesson goes to Jack Schwager for his incredible interviews with the Market Wizards, which provided the majority of my source material.

The five ‘Market Wizard’ mindsets

Here are five mindsets that we’ll focus on in this lesson.

• They credit their success to personal discipline
• They see trading as a game, and not about money
• They take a rational and practical approach to money and risk management
• They keep their thinking flexible, and their minds open to change
• They trade bigger when they have high conviction ideas

There are plenty more insights into trading psychology in the Market Wizard books, so I recommend you read them too.

Here, I’ll focus on what have been the most valuable learnings for me.

Let’s dive in.

The most important thing is personal discipline

Market Wizard Mark Weinstein said:

“Personal discipline is the key to trading success. If you can’t stick to your plan, you won’t be successful.”

Imagine a trader with no discipline. They fail to follow their rules. They enter and exit on a whim, or perhaps, much worse, they fail to have any trading rules at all.

Contrast this with a highly disciplined trader, who executes their plan flawlessly without exception, even when it seems like the most difficult thing to do.

Which trader would you want to be?

Let’s look at three ways to stay disciplined.

Have a detailed trading plan

Without a detailed written trading plan, it is incredibly difficult to be disciplined.

This is why this course focuses on giving you a rules-based trading plan to follow.

Market Wizard Victor Sperandeo said:

“Planning to get out before putting on the trade is a means of enforcing emotional discipline.”

If you trade with no plan, you become what is termed a ‘non-rules-based discretionary trader.’

That is, a trader who enters positions based on feelings, tips, or simply ‘what looks good at the time.’

These are mainly unsuccessful traders.

By having a set of written rules, processes, and objectives that you follow when you trade, you are exercising discipline.

You enter the realm of rules-based traders, where trading psychologist Dr Van Tharp suggests that 90% of successful traders live.

Have a core trading philosophy to help you stay focused and disciplined

As well as having a plan, it is important to develop a core trading philosophy.

Market Wizard Richard Driehaus said:

“You must fully understand, strongly believe in, and be totally committed to your trading philosophy.”

It’s by really, truly knowing what you are about as a trader, that your trading discipline goes up to another level.

This is why it is difficult to trade someone else’s trading plan.

You can have a great set of rules, but if you are not in tune with the reasons behind the rules, then you will find them tricky, or even impossible to follow mistake-free.

For example, without understanding your system’s ‘edge,’ and why you are holding on to a position, you will be tempted to grab your profit prematurely.

Don’t overvalue the outcome of any one trade

Disciplined traders detach themselves from the outcome and focus on the process.

Famous trader Steve Watson said:

“I usually don’t get excited by winners; I’m too busy looking for the next trade.”

Not every trade you place is going to be a winner.

Some will win, and some will lose.

It’s important as a trader not to get invested in the results of any one trade.

When you trade, control your emotions. Strive for a sense of balance, no matter what the market does.

Emotional control is a key component of personal discipline.

If you have a win, don’t get elated about it. If you have a loss, don’t get upset about it.

Instead, be happy simply that you have followed your rules no matter what the outcome is.

This will naturally result in the habit of having good trading discipline.

This concept leads to our next mindset – that trading is a game.

Top Traders see trading as a game, and not about money

One of the most interesting mindsets of top traders is the idea that trading is a game and that money is not important.

Many of the Market Wizards refer to trading as a game or mention game-based concepts when describing their trading.

Bill Lipschutz, who is considered one of the greatest forex traders in the world, said:

“I like the game. I think it’s a great challenge. It’s also an easy game to keep score of.”

Legendary trader William Eckhart started work at the company that launched Dungeons and Dragons. He is quoted as saying:

‘Commodity markets had all the ingredients for making a successful game’

and

‘trading has many of the elements of a game’.

Victor Sperando started off as a poker player and sees trading as:

“…taking risks when the odds are in your favor. Just like in poker, where you have to know what hands to bet on’

Author Jack Schwager said that according to legendary trader Jack Yass, the markets are like a giant poker game.

Michael Platt, when asked why he got into trading, said he was always interested in puzzles, and Jeffrey Nuemann said:

‘I look at trading like a puzzle’

You can see from these examples how common this mindset is.

There are two parts to this mindset that make it so valuable to traders.

• Treating trading like a game removes the money component and makes it easier to remain disciplined
• Trading, like games, is about playing the probabilities.

If you view trading as a game, then it follows that making a mistake is a failure to follow the rules, not if the trade works out or not.

Viewed through this lens, perfect game play becomes a lot easier to work toward.

Whether you make or lose money on any one individual trade is not important, rather it’s playing the odds well over time – one of the keys to being a disciplined trader.

Remember that money is not important

Trading is not about making money, it’s about following the correct trading processes, which result in money.

The challenge with focusing on the money is it puts pressure on the trader. If you feel stressed or pressured, you will make suboptimal decisions.

This is why viewing trading as a game is so powerful – it detaches the trader from the outcome.

Trading legend Tom Baldwin said:

“In our business, you have to have a total disregard for money. You can’t trade for money.”

Bill Lipschutz further clarifies this view when he says:

“If a trader is motivated by the money, then it is the wrong reason. A truly successful trader has got to be involved and into the trading, the money is the side issue… The principal motivation is not the trappings of success. It’s usually the by-product – simply stated, ‘the game’s the thing’.”

Top traders view money as unimportant (when they are trading), and just focus their attention on trading well.

If you do that, then the money will come.

Instead, if you focus on the money you are making or losing, you will tend to make emotional decisions based on fear and greed.

Focus your total attention on trading well, and following your trading rules, and let the results take care of themselves.

Regard trading like rolling a loaded dice

A further extension of this idea is that trading is a game of probabilities.

Your job is to follow your system, irrespective of whether the last trade was a win or a loss.

If your system results in some losses, accept that’s just part of the system.

It’s nothing to worry about, you are just playing the odds.

If you continue to roll the dice according to your trading rules, your losses will be far outweighed by the profits generated by your system’s ‘edge.’

Your ‘edge’ is your loaded dice, those winning factors built into your trading plan that will ensure your trading is profitable.

The problem occurs if you stop playing the odds because you are concerned about making money on a trade.

As William Eckhart said:

“Two of the cardinal sins of trading – giving losses too much rope and taking profits prematurely – are both attempts to make the current position more likely to succeed, to the severe detriment of long-term performance.”

Making an emotional decision to close a trade because you are worried about losing money is going to cost you over the long run.

This is because you will end up cutting your profits short. The key is to let your profits run, or not cut your losses because you don’t want to be wrong.

Think of your next trade as the first of the next 1,000 trades you’re going to make

Further to the ‘trading is about probabilities’ mindset, it’s helpful to put any trade in the context of your trading lifespan.

The reality is, the next trade you make is just one of potentially thousands you will place over your career as a trader.

While it might be nice for the trade to go in your favour, the market is going to do what it does, irrespective of your feelings.

If you can put all your trades in this perspective, it becomes much easier to calmly accept the results, whether good or bad.

Stick to your trading plan and follow the rules of the game.

Market Wizards take a rational and practical approach to money and risk management

During my career, I’ve talked to so many traders who have heard about how important risk management is, but then fail to give it any attention.

But if you want to trade successfully, risk management is not something you should dismiss.

Many, if not all Market Wizards emphasise risk management as being crucial to their longevity.

It is ingrained in their trading mindset.

Market Wizard Paul Tudor Jones, said:

“Don’t focus on making money; focus on protecting what you have.”

and

“Risk control is the most important thing in trading.”

He is a risk manager first, and a trader second.

Thankfully, risk management is not rocket science.

It is a matter of being practical and taking a logical approach.

As William Eckhart said:

“Ironically, even though money management is more important than the price model, mathematically, it’s the more tractable problem.”

If you break down your objectives and are clear about what you want to achieve you can build a position-sizing model to match.

Cut your losses short and let your profits run

While it is not universal amongst the Market Wizards, several of them attribute a large part of their success to holding on to their winning trades, and quickly getting rid of losing ones.

Famous trader George Soros is quoted as saying:

‘It’s not whether you’re right or wrong that’s important, it’s how much money you make when you’re right and how much you lose when you’re wrong.’

Remember – a trading system that works 50% of the time can be very profitable if you apply a good money-management plan that keeps your losses far smaller than your wins.

Play great defence first

Legendary trader Paul Tudor Jones further expanded on the topic when he said:

“The most important rule of trading is to play great defence, not great offense.”

A powerful risk-management mindset is about managing the downside, and not worrying about the upside. This is what great defence is all about.

Your first consideration should be the risk on the trade, and if that is acceptable – not how much profit the trade might make.

If you are still not convinced you should get out of a losing trade quickly, here’s what famous trader Ed Seykota has to say on this subject:

“The elements of good trading are:

(1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.”

He also said:

“If you can’t take a small loss, sooner or later you will take the mother of all losses.”

And here’s Victor Sperandeo on the same subject:

“I know this will sound like a cliche, but the single most important reason that people lose money in the financial markets is that they don’t cut their losses short.”

Remember, defence first.

Make sure that if a trade goes against you, it’s not going to have a large negative impact on your account.

It’s as Ed Seykota says:

“If you risk too much, you lose a lot. But if you trade carefully and minimise your risks, you will be able to play enough hands for your edge to manifest.”

You need to keep your risk small enough so that you can survive a series of losses.

Position size is as important as your entry point

A common theme amongst the world’s greatest traders is that ‘how much you trade’ is more important than the entry point.

Edward Thorp has this to say about this subject:

“Varying the position size can be just as important as the entry methodology.”

Your position size, not your entry point, will determine your profit or loss on the trade.

This is a key premise of Dr Van Tharp’s work on position-sizing.

He suggests it’s how much you invest in a trade that is the most critical factor, not the trade idea itself.

Larry Hite’s approach was to:

“Never risk more than 1% of total equity on any trade. By only risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical.”

By risking 1% per trade you have time for your edge to materialise. It also keeps things simple, which is important to successful trading.

Market Wizards keep their thinking flexible, and their minds open to change

Good traders have humility.

They have the ability to admit when things are not going their way, and to make a new decision.

They know that part of trading is being wrong.

Ed Seykota sums this mindset up beautifully with the paradoxical quote:

“The trading rules I live by are:

1. Cut losses.

2. Ride winners.

3. Keep bets small.

4. Follow the rules without question.

5. Know when to break the rules.”

(In fact he sums up many of the points in this lesson with this quote.)

To make money, you have to be prepared to be open to the possibility of changing your opinion.

Seykota follows his rules, but is self-aware enough to know that he may on occasion need to break them.

You should hold no great loyalty to your trading systems or positions.

Anything that has happened in the past is history, and if things change, you need to change with them, too.

Peter Brandt has the philosophy:

“strong opinions, weakly held.’

No matter how good he thinks his idea is, he will ‘drop it like a hot potato’ if it does not play out.

This flexibility is common across many of the legendary traders interviewed.

Jack Schwager sums up the most critical factor in Marsten Parkers success to:

“His willingness to substantively change or even abandon entire systems when it appears they have lost their efficacy”.

It’s this humble mindset that allows top traders to survive in the markets over the long-term.

Learning from mistakes

By keeping an open mind, you can follow this wonderful piece of advice from Steve Clark.

“Do more of what works and less of what doesn’t.”

If you are clear about what is working you can keep doing more of it, and stop doing what is not.

Michael Kean supports this idea. He suggests that:

“You need to be great at learning from your mistakes. Analyse every mistake you make until you learn something from it and then incorporate it into your process”.

Having an open humble mindset allows you to learn from what you have been doing wrong.

Jason Shapiro goes as far as to say:

‘I succeeded because I failed so many times and have an open mind about failure and was able to learn from it’.

By having an open mind, you turn every trade into an opportunity for growth, and a chance to improve your trading.

Market Wizards trade bigger when they have high conviction ideas

If top traders have a great deal of conviction about a trade, they have the courage and discipline to trade a much larger size.

Their trades are very calculated, and they have very good reasons for putting them on.

They only enter the market when their edge is clear

They combine risk management and personal discipline, with the patience to wait for high-conviction ideas

They have the courage to act on those ideas by taking a large position, and holding on to it until either they are proven wrong, or they have reached their maximum profit potential

Stanley Druckenmiller, the heir apparent to George Soros’s Quantum Fund, colourfully suggests that for truly superior returns you need to have the “courage to be a pig.”

By this, he means that if you see a great trade, you need to be prepared to make the most of it by taking an aggressive position size.

In one of his particularly insightful interviews, he says the way to make truly superior profits is to grind it out until you are up 30-40%, and then, if you have the conviction, go for a 100% year.

He sums this up with the statement:

“The way to build long-term returns is through preservation of capital and home runs.”

If you do the maths, having a few large winning trades or years can make a significant difference to your long-term returns.

Another Wizard, Amrit Sall, said:

“I am disciplined, which allows me to leverage when there is a major trade opportunity.”

If you have the patience to wait for very good trades, it will reflect in your performance. There is no need to rush, as opportunity will come knocking.

Jeffery Neumann “…steps on the gas when he has particularly high conviction in a trade.”

He has a win rate of well less than 50%, but does well because he can:

‘…recognize the one or two times a year when all the pieces of the puzzle are in place, and [he needs] to bet big on a trade.’

These Wizards all understand the value of trading bigger when you have conviction.

In my experience, developing conviction takes a lot of practice and research – and you can still be wrong.

This is where scaling into trades as they go in your favour can help you to build a large position, while limiting the risk if the high conviction idea does not work out.

Master your mindset

There is no denying the importance of your mindset when it comes to trading.

While the specific trading approaches of successful traders may vary, they share common mindsets.

By adopting the thinking patterns and habits outlined above, you can develop the discipline, risk management skills, and mental fortitude needed to become a successful trader yourself.

In the next lesson, I’ll discuss how you can make changes to your psychology if you get stuck.

Till next time,