4 Steps to Mental Toughness for Short Term Traders

As all MarketClub members know, psychology is a major factor in both investing and short term trading.  Chris Dunn, from the Emini Academy, is a major proponent of developing the proper mental mindset of a professional trader, and this week he’s contributing a helpful post on four steps you can take to have a strong trading mindset.
In my opinion, day trading is top on the list of mentally stimulating professions.  It requires a mental toughness unparalleled by any other business.  For example, the influx of emotions and sensations felt by someone in a short-term trade can bring on fear stronger than that of certain death, or a euphoric sensation as if you just inherited a windfall of profits.

To become a professional trader with the ability to thrive in all market conditions, one must develop understanding and control over their personal psychological strengths and weaknesses.  In this article, we will talk about 4 steps that can help you develop a strong trading psychology and confidence to become a top-level day trader.

Step 1 – Build a Strong Foundation

No matter what instrument or time frame you choose to trade, you need to have a solid understanding of the knowledge needed to trade that market.  This can include everything from market basics (like contract specifications for futures traders), technical analysis, risk management, and order execution.  There are many great day trading courses that can give you a broad understanding of all of those categories.

Along with risk management, comes discipline. You need to practice staying out of the market when you know the odds are not in your favor.  So many people know when this occurs, but still chase trades. It’s all about control. You have to train your brain to think of the market as an opportunity pool, instead of getting stuck on low probability trades where you end up playing catch up.

Having a general education of the necessary short term trading tools is vital to your success, but is only the beginning…

Step 2 – Formulate Your Trading Action Plan

Once you have a solid understanding of the basics, then you need to develop an action plan that fits your personality and risk tolerance level.  This includes the type of trades you take, your risk structure, and technical analysis strategy.  Here are a few important questions to ask when developing your own personal trading action plan:

  • Do I have a positive expectancy based on my risk-to-reward ratio and win ratio?
  • What are my high probability situations based on my back testing and experience?
  • What is my signal for an entry, and how do I determine profit targets?

It may seem trivial, but every trader needs a “road map” that establishes their decisions prior to trading in the live market.  Taking the time to write this out ahead of time will give you a personal level of confidence that most traders never experience.  This can be the difference between blowing out your trading account and seeing consistent profits.

Something that helps me is starting every day with a prime trade; something I feel very confident with. Even if the trade doesn’t work out, I just want to gain confidence knowing that I am trading according to my plan. When you get a setup that you know fits your plan, play it boldly.  If it goes the opposite way, that’s ok.  You need to get comfortable with winning and losing.  Look at every trade as an individual event, and don’t let the outcome of a prior trade change the way you execute the next.  For example, a loss on the prior trade doesn’t mean that your setup won’t work on the next opportunity.

Step 3 - Develop Your Skill and Execution

Trading is a performance activity, and just like any professional athlete or competitor, day traders perform a sequence of action sets.  If executed properly, a trader’s executions can be very profitable.  Just like a professional golfer goes to the driving range, we must continuously take the time to develop and refine our skills.

A common misconception with traders is that they can read a book or take a course and start making money the very next day.  For most of us, that’s not a reality.  We need to go through a progression where we take our knowledge and develop a skill.  Here are a few skills that are worth taking the time to practice:

Trading Skill #1:  Recognizing and anticipating high probability situations before they occur

Trading Skill #2:  Executing your entries without hesitation or double-mindedness

Trading Skill #3:  Profitably managing your trades without getting shaken out by price action

Breaking these tasks up into individual skills can remove the overwhelming feeling some traders encounter when they start trading the live market.  Any experienced trader will tell you that trading the live market is dramatically different than looking at historical charts, and requires a much deeper level of perspective to be able to profit on a consistent basis.

Also, don’t think of your trading in terms of money.  Instead, look at it in terms of your performance, not how much you’re winning or losing.  It’s possible to profit with poor performance, but that will eventually catch up with you.  If you’ve been making money with undisciplined execution, then you have essentially been rewarded for reinforcing bad habits.

Step 4 - Review, Modify, Execute

It’s vital that you review every trade you take, regardless if it’s with real money or simulated trading.  You must be accountable to yourself for everything you do in the market.  If not, you could be setting yourself up for some big surprises.  For example, if you take trades on a simulator that you wouldn’t take with real money, then you have very little chance of seeing the same results when you make the change to cash trading.

After you have some logged results with the trading action plan you prepared in step 2, then you can review the data to see if there’s room for improvement.  This could mean adjusting your risk management structure, or modifying your trade setup criteria.  Remember, trading is about continuous improvement.  Don’t get discouraged if you’re not satisfied with your current results.  Rather, shoot for steady progress in the right direction.

Finally, once you’ve re-evaluated your plan and made adjustments based on your current results, then you can go back and execute knowing you’ve done everything possible to stack the odds in your favor that can give you the greatest chance of success.

These four steps can give you the confidence you need to develop a high level of mental toughness.  Learning the basics will give you the assurance that you have the technical knowledge necessary to trade your market.  Then, writing out your action plan will give you a road map that guides your decisions.  Taking the time to develop your skill will grant you personal confidence needed to trade the live market.  Finally, reviewing and modifying your existing plan will put you in the right state of mind and ensure constant improvement.

Chris Dunn
Emini Academy


15 thoughts on “4 Steps to Mental Toughness for Short Term Traders

  1. Great blog! I definitely enjoy just how this is actually straightforward upon my eyes as well as the information usually are well crafted. Im curious just how I'll be notified every time a new content was made. I've subscribed for your feed which must do the trick! Have a great day!

  2. Ah, Chris Dunn ... I ran into you when I was investigating FUTURES trading ... hope your business and your trading is going well .


  3. Allen,

    If you will permit me to respond to your comment;

    I picked up on "Jesse Livermore" years ago and was very impressed with the emphasis placed on knowing when to stay out of the market. I believe that many traders are conditioned to always be in the market e.g. the mantra repeated ad nauseum - "Buy ,Sell or Hold?" Notice that "Step Aside" is not part of those timing options. You will sometimes hear "Don't Buy" but seldom if ever "Step Aside" Wall St. doesn't want you to Step Aside and Profit Makers" sure don't want you to Step Aside and THINK before you act. Again Livermore must be credited for believing that "Step Aside" is also a trade timing decision.

    I took this one step further buy establising "Step Aside" as my initial default position; hence I would say the trade timing decision is Step Aside, Buy, Hold , Sell. Simply my initial stance is to "Step Aside" until the balance of probabilities ( generated by my trading rules ) suggest I should consider scaling in.

    This is a very different psychology that has worked 15 years for me. Trust it may provide some assistance for others.

  4. Good work... it is especially important for investors to paper trade for a while until they develop a profitable strategy. What's the point of "trying it out" with your hard earned cash.


  5. Thanks Chris
    A really fine article that made me think. I'm a compulsive optomistic addictive overtrader, so I like the line "You need to practice staying out of the market when you know the odds are not in your favor."
    Relates particularly to me.
    Well done


  6. Hey John,

    I agree... a lot of the same day trading best practices can be applied on swing or position trading.

    For a lot of people, risk and money management is the aspect that takes the most work. There are so many different options you have with managing risk and where you take profit. Not to mention there aren't really any "rules" when it comes to managing your own money. As long as you have the required capital or margin, your broker's probably going to let you do whatever you want.

    Good point about sim trading... I think it can be a useful tool, but is also a double-edged sword. For some people it actually becomes a crutch. I think it's good for developing some consistency and confidence, but staying on sim too long can cause problems.

    Isn't is a great feeling when you're in control?

    Stay profitable my friend!

    Chris Dunn

  7. Great article and very valuable advice.

    Even though I'm a trend-following swing trader, the advice is pretty much the same to meet the tough challenge of trading.

    It took me many years to learn the hard way. But now I feel confident of most of what is covered in the four steps.

    Where I need some improvement is mainly with risk and money management.

    My gambling instinct and 'spirit' is too powerful to waste time with simulated trading. I have been a high roller in blackjack for many years and without some risk I do not find the 'game' even enjoyable.

    It's a great feeling to feel confident and be in charge of my emotions and intellect, besides the knowledge and methodology required as described in your article. My spirituality/consciousness also helped me to meet the great challenge of trading at a personal level.

    Thank you, Chris Dunn. Keep up with the good work.

    John Jay

  8. Amen Ron! I think the more confidence we have, the less influence our emotions can effect us.

    Jon, I notice that when my mind shifts to money (for even a split second), all the technical and rational analysis goes out the window. I'm constantly telling myself, "stay focused on the technicals... what are my charts telling me?"

    - Chris Dunn

  9. The biggest one for me has been to focus on always being a better trader rather than making money. When I focus on making money it leads to highs and lows which take away mental toughness in the long run. Now I judge my outcomes by how well I traded, not the results in my buying power.

  10. Thank you Chris Dunn.

    Right on- Discipline builds trading confidence throughout a lifetime.

    I firmly believe that confidence is building the emotional preparedness intrinsic to all trading and absolutely essential at market extremes. i.e : can I overcome my greed at market tops and sell into strength? Can I overcome my utter panic at market bottoms and buy the carnage?

    THE on-going challenge is t develop and build through experience a confidence (emotional preparedness) appropriate to the trading environment.


  11. Thanks for your feedback guys...

    Nelson, I agree that the simulator can be a great tool for developing confidence before putting real money on the line.

    Great job Doug!

    Dan, I'm glad you enjoyed the article.

    Stay profitable!


  12. Absolutely hits the nail on the head. Well thought out and well
    written. Thank you.

  13. When I notice I'm being successful, this is what I find I've been doing.
    +5 points.

  14. Kenny,
    In my view using the simulator is valuable for recognizing profitable set-ups. New traders should study, study, study,simulate, simulate, simulate to practice discipline and to avoid overtrading.
    This article was very helpful to me.
    The simulator will soon help new traders to learn that they cannot beat the market...only Play The Game.

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