Creating a Mental Edge as a Trader

How to cultivate a winning mindset when trading

Hey there! My name is Nate and I write for WOLF Financial. If you enjoy learning about trading, I guarantee you’ll also enjoy my content on 𝕏 @tradernatehere. Thanks for reading!

This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.

In the world of trading, it's not just about the numbers, charts, or the latest market news. It's also about maintaining a mental edge.

That is why it is worthwhile to dive into the psychology of successful trading and how cultivating a winning mindset can give you an advantage in the market.

It's about your resilience as well as your adaptability and includes a healthy dose of risk tolerance.

Successful trading is also about understanding that losses are part of what we do and that every setback is nothing more than a setup for a comeback.

But how do we get there? How can you create this mental edge?

Let's break it down.

Taking Profits Early: The Power of Contentment

One of the key aspects of a winning mindset is knowing when to take profits.

It is easy to get greedy when a trade is going well but the market is unpredictable. Greed can quickly turn to regret.

Taking profits early improves your overall odds of walking away with a gain, no matter what happens next.

It also lowers your cost basis, meaning you have more room for the trade to move against you before hitting your break-even point.

Knowing that you’ve set yourself up for improved odds of success is powerful and can improve your mindset for the rest of the trading session.

This doesn't mean you should always sell the moment you see any profit, but it does mean there is a lot to gain from setting a target and sticking to it.

I like to take profits on the first big push which usually drives options prices up quickly, allowing for a decent initial percentage gain.

The size of the gains depends on the shares or options you are trading.

For example, if I am trading 0DTE options, an initial 10-20% move in the option contract would be where I initially take profits.

Resist the temptation to hold on to your entire position for a potentially larger gain that may never come.

I usually make an initial sell for 40-60% of my position.

If you fail to take profits, the chart may turn against you. Take a look at the chart for TSLA as an example.

TSLA daily candles make a big move.

You can see the quality entry on the retest of support was followed by an immediate push through AVWAP (gray line) on strong volume.

This is where initial profits should be taken. You can see that it did not take long for shares to reverse and if you were in options, your profits turn to losses.

Of course, TSLA could have continued to move higher which would have been captured by the remaining shares or options contracts held.

But shares instead reversed, making those initial sell orders that much more valuable.

Taking profits early secures small wins but also instills a sense of discipline and contentment, crucial traits for any successful trader.

Cutting Losses Quickly: The Art of Letting Go

Just as important as knowing when to take profits is knowing when to cut losses.

Holding onto a losing trade in the hope it will turn around is a common mistake.

You do this because you are driven by an aversion to loss, a powerful psychological force that can cloud our judgment.

Take another look at the TSLA chart, this time annotated to highlight what happens when you don’t cut your losses when you should.

TSLA giving it back

Cutting losses quickly is about accepting that not every trade will be a winner.

It's about letting go of the need to be right all the time and focusing instead on protecting your capital.

You don't have to win every trade to be successful in the market. You just need to make sure your wins outweigh your losses.

Learning from Mistakes: The Value of Reflection

Every trader makes mistakes. It is inevitable.

We are human and until AI takes over and perfects the art of trading, you should expect mistakes.

What separates successful traders from the rest is what they do with those mistakes.

Do you dwell on them, letting them feed into a cycle of fear and doubt? Or do you see them as learning opportunities?

Every loss is a chance to learn something new about the market and about yourself as a trader.

Did you miss a key piece of information?

Did you let emotions drive your decision?

Reflecting on these questions can provide valuable insights and help you avoid similar mistakes in the future.

Cultivating a winning mentality is not about eliminating losses or guaranteeing profits.

It is about learning, adapting, and maintaining a level head in the face of market volatility.

It is about taking profits early, cutting losses quickly, and always finding a positive in every situation. Even in the losing trades.

Your mental state is just as important as your strategy.

Have a great week of trading ahead and take steps to maintain your mental edge!