10 Steps to Developing a Winning Trader’s Mindset (Transcript)

 

Welcome to the presentation. My name is Tim Racette and it’s my pleasure to be speaking with you.

In being here at the expo this late in the day, I know you are truly dedicated to becoming better traders. In the next 60-minutes you will learn the principles that make up a winning traders mindset and I promise you will take away some valuable techniques for improving your own trading.

As Yogi Berra once said, “Baseball is 90 percent mental. The other half is physical.”

I believe trading is 90% mental; the other half is execution. There’s no doubt execution is incredibly important, but without the proper mindset, a trader lacks a foundation to build upon.

For the past 10 years I have studied some of the greatest winners of our time, ranging from traders to athletes to business leaders. What makes them great? How did they come to be winners? I’ve documented my findings and condensed this knowledge into today’s presentation.

The goal of this talk is to give you a specific action plan to help you develop into winning traders. I began with the title “10 Steps to Developing a Winning Trader’s Mindset,” but as time went on I realized what I had put together are really 10 principles. I’ll provide many examples from winning traders and conclude with a list of action steps in hopes that one day you may join the top ranks of the trading elite.

About Me:

I’m a full-time stock and futures trader. I began my career in 2006 and went full time in the fall of 2009. I was born and raised in the Chicago-land area.

I currently reside in Madison, WI and spend my winters in Scottsdale, AZ. It was in Arizona that I discovered my other passion, mountain biking. As some of you know, I competitively race mountain bikes and spend my time away from the computer riding and training for races.

Trading itself has opened a world of opportunity for me. It’s given me the ability to live my life according to my own terms and travel quite a bit. If you ever find yourself down in Costa Rica, I highly recommend visiting the little town of Santa Teresa on the Pacific Coast.

While much of my trading knowledge has been gained from experience, I learned my most valuable principles from a couple very successful traders back home in Chicago. These lessons came from the floor of the CBOT and a few individual screen traders with 30+ years of experience. Needles to say I’ve had some fantastic mentors along the way which helped accelerate my learning curve.

You can read more about me, my trading, and my travels at my blog, EminiMind.com.

Transition:

My presentation today is comprised of 10 slides, each covers 1 of the 10 principles that I believe make up a winning trader’s mindset. I’ll be referencing quotes and ideas from a number of great traders as we go.

You’ll recognize this quote from the opening slide.

“Winning is not a sometime thing, it’s an all time thing. Winning is habit. Unfortunately, so is losing.”

Having missed more than 9,000 shots in his career, lost almost 300 games, and on 26 occasions was entrusted to take the game winning shot and missed, Michael Jordan says,

“I have failed over and over and over again in my life. And that is why I succeed.”

How did legends such as Michael Jordan become to be such great winners? It starts with commitment. Committing to do “whatever it takes,” (under ethical and moral standards I might add). All great success begins with a commitment to yourself. Go out and give 110% because if something is worth doing, it’s worth doing well.

In trading, commitment begins with our time. In being here today you’ve shown the first step in that level of dedication. After commitment we build confidence, confidence in ourselves and our trading system. This confidence leads to the development of consistency, and once we understand how to adapt to ever changing market conditions we begin to produce consistent winning trades over time.

Let’s delve into the specific principles, which help build confidence and consistency in trading.

10 Principles:

1. Flexibility (George Soros)

Hold no attachment to trades

Colm O’Shea a trader at George Soros’ hedge fund recalls that Soros had the least regret of anyone he’s ever met. He has no emotional attachment to an idea. When a trade is wrong he will just cut it, move on and do something else.

“I remember”, he says, “one time he had this huge Forex position. He made something like $250 million in one day. He was quoted in the financial press talking about the position. It sounded like a major strategic view he had. Then the market went the other way, and the position just disappeared. It was gone. He didn’t like the price action, so he got out. He doesn’t let his structural views on how he believes the market will play out get in the way of his trading.”

Change opinions on a dime

When people ask me for my opinion about the markets I always tell them, “what I think the market should do today may not be the same view I hold tomorrow.” As traders, it’s not our job to be right; it’s our job to make money.

A quote from O’Shea, “the most important change in my trading career occurred when I learned to divorce my ego from the trade. Trading is a psychological game. Most people think that they’re playing against the market, but the market doesn’t care. You’re really playing against yourself.”

Focus on the here and now

Quick decisive decision making is crucial. We base our decisions on the information in front of us at the time of the trade.

You have to stop trying to will things to happen in order to prove that you’re right. Listen only to what the market is telling you NOW. Forget what you thought it was telling you five minutes ago. Remember the objective is not to prove you’re right, but to hear the cash register ring.

Intuition is gained from experience

Whether you consider yourself a discretionary trader or mechanical trader there’s a level of intuition and feel that develops from observations and experience.

In addition to live trading and reviewing charts, the quickest way I’ve found for developing a sound trading intuition is to keep a log of market behavior.

Write down what is happening in the market. Then write down what you think will or should happen as a result. Once the outcome is revealed, compare your initial hypothesis. This is a great way to build a solid macro understanding and strong intuition.

2. The Importance of Implementation (Colm O’Shea)

Right strategy for the idea

With so many markets and instruments out there to trade there are many ways to express your ideas. It begins with an observation or hypothesis. Sometimes buying the underlying is the best trade. Other times, a derivative or currency makes for a better play.

When looking to express an idea in the markets, seek out the trade with the least risk, greatest reward potential.

Draw a line in the sand

Know where you are to be proven wrong before even entering a trade. Start by deciding where the market would have to go, that is at what level your idea would be invalidated. This is where you place your stop. Colm O’Shea stressed this idea in his trading.

Execute consistently

Even though I place my trades manually, I try to be as mechanical as possible. This means, if I see a setup that meets my criteria, I take it. The mechanics of trading should not be left up to the judgment of the trader. To be a winner you have to be able to toe the line and pull the trigger.

Embrace uncertainty and risk

I accept that a trade will be a loser even before I enter the position. That is, I’m accepting the worse possible scenario and I’m okay with it. This keeps me focused and objective during the entire trading process.

3. Belief is in the Numbers (Richard Dennis)

Think like a “Turtle”

The turtle trader experiment resulted from a dispute between commodity speculator Richard Dennis and long time friend Bill Eckhardt over the idea of whether great traders were born or made. Dennis believed that he could teach people to become great traders. Eckhardt thought that genetics and aptitude were the determining factors.

In order to settle the matter, Dennis suggested they recruit and train some traders, giving them actual accounts to trade and see which one of them were correct.

The most profitable trader of the group, Curtis Faith found that the rules instructed by Dennis were easy to follow because they were not only very precise, but provided answers for each of the decisions they were to make while trading. This made it easier to trade consistently because there was a set of rules which defined exactly what should be done.

Ignore individual trade outcomes

The best way to gauge our trading performance is not to look at the result from our last 1 or 2 trades; it’s to look collectively at a group of say our last 20 trades. In this way, the outcome of each individual trade is masked. This also helps dilute any “recency bias” that we may encounter and prevents past trades from influencing future decisions.

Calculate your expectancy

Expectancy is simply you projected return over a longer period of time. Expressed (Avg $ W x Win %) – (Avg $ L x Loss %) – commission per trade.

Dennis says, “If you know that your system makes money over the long run, it is easier to take the signals and trade according to the system during periods of losses. If you are relying on your own judgment during trading, you may find that you are fearful just when you should be bold and courageous just when you should be cautious.”

4. Accept Mistakes (Ray Dalio)

Mistakes lead to improvement

Check your ego at the door and accept that you will be wrong. Mistakes provide the path to improvement and ultimate success. Each mistake offers an opportunity to learn from the error and to modify one’s approach based on this new information.

Whenever you make a significant mistake in trading, write it down, both to reinforce the lesson and to serve as a future reminder. Then change your trading process based on this new experience. In this way, mistakes can become the essential ingredient for continual improvement as a trader (or any endeavor for that matter).

Be bold, embrace disagreement

Ray Dalio, founder and trader of the largest hedge fund in the world Bridgewater, employs a culture encouraging independent thinking and innovation. Dalio believes there must be thoughtful disagreement and non-ego impaired exploration of mistakes and weaknesses to achieve goals.

Imagine how much better decision making would be if people who disagree were more open to trying to get at the truth through thoughtful discourse. It is a process that produces discovery.

Collaborate on ideas

Something you may not know about me is that I studied architectural design in college. One of the things I loved about design studio was the ability for collaboration. When an idea first pops into your head it seems fantastic, but as you begin to discuss your idea with others, questions arise that you may not have thought about at first. Thinking through all these facets leads to the development of a structurally sound idea.

Seek out opposing views

The better we understand the opposition, the better we can understand who is on the other side of our trades and how they might react.

The great thing about being a trader is that you can always do a much better job, no matter how successful you are. Most people are busy trying to cover up their mistakes. As a trader, you are forced to confront your mistakes because the numbers don’t lie.

5. Find what works for YOU

Do as others do NOT

In order to achieve greatness we must get uncomfortable. As a trader, you can’t be afraid of going against the grain.

If you do the same as others do, you can expect to be average. Going against the grain is tough. There can be a lot of social pressures and questioning from family and friends. In order to live your life the way YOU want, you need to put yourself in opportunistic situations. Surround yourself with the people you want to be like who share your same moral beliefs.

Think about the opposite

Look at things from all angles and think about the opposite action. When a lawyer prepares a case they will often prepare the opposing arguments first. In this way they know what to expect and have all their bases covered. In trading, think about who is on the other side of your trades and if you were that person, how you would react.

Just because everyone is buying gold, doesn’t mean you should too. The media and the talking heads are often on the wrong side of the trade.

Learn by doing

There’s no substitute for experience. Go out and try something. If it doesn’t work for you, learn from it and move on.

Isolate yourself from negativity

Surround yourself with people who have a positive impact on your life. Learn from those who’ve come before you, taking bits and pieces, making them your own.

Get uncomfortable, don’t be afraid to be different!

6. Over Prepare (Ed Seykota)

Follow your passion

Winners don’t just work harder than everybody else. At some point they fall in love with their craft to the point where they want to do little else, it becomes their life. Trader Ed Seykota says,

“I feel my success comes from my love of the markets. I am not a casual trader. It is my life. I have a passion for trading. It is not merely a hobby or even a career choice for me. There is no question that this is what I am supposed to do with my life.”

Luck favors the prepared mind

No one is perfect, especially in trading, but preparation pays. It’s essential to know more than the other players in the game. You’ve heard the saying the rich get richer, well the lucky also get luckier. To increase your luck, you must adequately prepare for the day ahead. The trader who shows up better prepared will be the one with the greatest chance of coming out ahead.

Think like a chess player

Always be thinking 2 steps ahead. Don’t think about what the market’s going to do; you have absolutely no control over that. Think about what you’re going to do if it gets there. In particular, you should spend no time at all thinking about those rosy scenarios in which the market goes your way, since in those situations, there’s nothing more for you to do. Focus instead on those things you want least to happen and on what your response will be.

Never stop learning

The worst thing we can do is to stop learning. We get settled with our lives and become complacent, stuck in our comfort zone. In order to evolve as a consistently profitable trader you must constantly be on the lookout for opportunities. I find myself always thinking about the markets and new ways to implement my ideas. Life is an iterative learning process.

7. Visualize (Jesse Livermore)

Believe in yourself

Greatness starts from within. You must believe in yourself and your ability to become successful.

Attitude influences behavior

Jesse Livermore made and lost his fortune a number of times over. Donald Trump is another example. These individuals share the same mindset; they believe that they can build back up from scratch. Their mental attitude and belief in themselves gave them the confidence to achieve greatness.

Mental practice

One reason Tiger Woods was such a great golfer is not necessarily the hours spent at the range, but time spent off the course using a combination of visualization techniques and internal biofeedback.

As Tiger’s caddie Steve Williams describes it,

“instead of spending hours on the practice field right before a tournament, he pictures how he wants to swing the club, creating a mental image of himself that he is then able to relate to the movement of his body and transfer to his golf swing.”

Envision your ideal self

Before you fall asleep each night, take moment to envision your ideal self. Close your eyes for a moment…

  • What does your ideal self look like?
  • What are you wearing?
  • How do you carry yourself down the street?
  • Approach others?
  • Make decisions?
  • What things surround you?
  • What people surround you?

When repeated and practiced with deep though these visualization exercises go a long way towards turning ourselves into the person and trader we want to be.

8. Evaluate Yourself Based on Your Goals (William Eckhardt)

Don’t compare yourself to others

This principle goes far beyond trading. There is absolutely no reason to compare your situation to that of others.

What is your unfair advantage?

Everyone has something that is unique to them and no one else. Trader Bill Eckhardt is quoted with saying if a betting game among a certain number of participants is played long enough, eventually one player will have all the money. If there is any skill involved, it will accelerate the process.

Something like this happens in the market. There is a persistent tendency for equity to flow from the many to the few. In the long run, the majority loses. To win you have to act like the MINORITY. If you bring normal human habits and tendencies to trading, you’ll gravitate toward the majority and inevitably lose.

Draw your own conclusions

“The average man doesn’t wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think.” That’s a quote from Jesse Livermore.

Set personalized metrics

We each live in our own reality with our own beliefs. Winners compare themselves to their own goals, not to the achievements of others.

9. Establish a Routine (Martin “Buzzy” Schwartz)

Create a solid foundation

Dedication and discipline are the foundation of success, hands down. A consistent routine develops habits that transform into subconscious behaviors.

Champion futures trader Martin “Buzzy” Schwartz ran a lock tight schedule waking everyday at 6:45, asleep at 10:30.

For a period of time I used to run a split sleep schedule, sleeping for a few hours waking up to trade the Euro open and then returning to bed before the NYSE open. Over time it took its toll on the body, especially with racing mountain bikes. What it did teach me however, is the importance of adhering to a routine, day in and day out.

Focus on what you CAN control

You have more power over your trade outcomes than you might think. While no one can control the market itself, you can control your actions and reactions. You can control how well you prepare and plan for the given trading day, and most importantly you can control your risk exposure associated with a position.

Schedule meditation, walks, and exercise

I’m a big believer in having balance in life. Think time is incredibly powerful. When you’re in a rhythm you feel great. Taking walks, listening to podcasts, getting outside, exercising, playing sports, sitting quietly, meditating, these are all things that help bring a healthy balance to a person’s life and have a great impact on a person’s long-term success.

10. Be Humble (Paul Tudor Jones)

Always question yourself

As Paul Tudor Jones puts it, “don’t be a hero. Don’t have an ego. Always questions yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.”

Feeling invincible is a death trap

If you’re not careful the market will take from you in an instant that which you worked longest and hardest to obtain. When you’re experiencing a string of winners and feel like you are untouchable that’s precisely when you should be the most cautious.

Use positive self talk

Studies show positive self talk has a strong impact on your actions so it’s important to talk to yourself in a positive way. Responding positively to situations helps keep a clear head and reinforces a good attitude. As I said before it is our attitudes that influence our behavior.

Give back

I’m not alone when I say that it is better to give than to receive. I’ve had the privilege to learn from some exceptionally great traders who were doing their part to give back what they had learned. I’m a strong believer in giving back anyway I can.

Here’s an Action Plan for you to consider:

  1. Commit (commit to doing what you love)
  2. Be flexible (do not become attached to your trades)
  3. Focus on execution (trade the right strategy for the idea)
  4. Calculate your expectancy (the #s need to make sense)
  5. Hold yourself accountable for your mistakes (this is the path to improvement)
  6. Do what works for YOU (don’t be concerned with what others are doing, go against the grain)
  7. Establish a routine (it’s always best to over prepare)
  8. Determine your unfair advantage (we all have one, what’s yours?)
  9. Remain humble
  10. Visualize what you want, then make it happen!

Conclusion:

Put some thought into these principles and incorporate them into as many aspects of your life as you can. Trading is a fantastic teacher of life’s greatest lessons. Allow the trading journey to shape you into the person you want to become.

Thank you so much for your time today. I wish you the best of luck in your trading!

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  1. Outstanding! Wish i had been there to see the presentation live. I’ve been trading for over 20 years and I read the whole thing eagerly looking forward to your next point.