Trading Mindset

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

This note includes the following topics:

  • Fear of Missing Out (FOMO)
  • The Confirmation Bias
  • The Recency Bias
  • Focus
  • Noise
  • Confidence
  • Money


Fear of Missing Out (FOMO)

  • You missed out on a big trend, but since it keeps rising you feel it would be stupid not to join in
  • By the time you place your order, the train has already left the station. The trend then reverts and you lose money
  • Traders usually ignore their strategy due to FOMO and lose their EDGE

The Confirmation Bias

  • The tendency to search for information that confirms one’s beliefs while rejecting facts/information that casts doubt on it
  • Confirmation bias cycle:
    • A trader gets a hot stock tip (from social media, chatroom, newsletter, guru, etc.)
    • Looks for positive remarks in Yahoo Finance, Seeking Alpha to justify buying that stock
    • The trader may get lucky and generate a short term profit
    • Reinforces BAD habit
    • The trader then gets super confident and removes his stop loss
    • Reinforces another costly BAD habit
    • Later the stock value goes down. Ignores any stop-loss rules
    • Calls his friend or finds his stock guru for confirmation once again
    • CNBC: Company CEO is very bullish
    • Later the stock value rises back slowly
    • Confirms his bias which gives confidence
    • Reinforces BAD habit
  • Overcoming confirmation bias:
    • Have Entry/Exit checklists
    • Quit seeking other people’s opinion
    • Use hard stop loss

The Recency Bias

  • The tendency to think that trends and patterns which occurred recently will continue in the future
  • Each trade should be treated independently
    • Recent losing trades do NOT mean the next one will be
    • Recent winning trades do NOT mean the next one will be
  • Overcoming recency bias:
    • Regardless of what happened recently, always respect the Strategy


  • Focus on executing your trading Strategy perfectly
  • Do NOT focus on money which leads to
    • Entering trade without a buy signal for making a quick buck (FOMO)
    • Staying too long in a trade to make a certain amount of money
    • Exiting a trade too early in the fear of losing a paper profit
    • Not respecting your stop loss to regain your paper loss
    • Revenge trading after losing a specific amount of money


  • Anything outside of your trading strategy
  • Sources of noise:
    • Twitter, Stocktwits
    • Friend’s and Guru’s trading idea
    • Newsletter and Economic reports
    • CNBC, Economist Opinion, S&P500 Charts
  • Overcoming noise:
    • Be self-reliant with a positive expectancy trading Strategy
    • Tune out the noise and social media


  • Having confidence in your Strategy will allow traders to AVOID:
    • System hopping without fully utilizing a strategy
    • Not respecting your stop loss
    • Not taking an entry which might be a 10R trade.
    • Overtrading (after seeing fake PnL of many influencers)
  • Losing streak will trigger loss of confidence
    • Every trading strategy will have an inevitable losing streak
  • Overcoming low confidence:
    • Know your strategy inside out
    • Think in probabilities, not in certainties
    • Customizing a strategy to be your OWN
    • Trade journal to motivate you in low days


  • Money is just a tool as a knife
    • Can be used to build schools, cure diseases, fund charities, etc
  • Not all rich people are bad. In fact, they are hard-working people. Media highlight the extremely bad ones

Money Scarcity Mindset

  • Thinking it is difficult to make money and easy to lose it
  • Consequences:
    • Makes a trader freeze when a trade goes wrong losing a lot of money
    • Taking a profit too early which may not offset all the small loses(bound to happen in any trading strategy)
    • Being more risk-averse when your account grows bigger
  • Books:
    • Acres of Diamonds by Russell Herman Conwell
    • The secret of the millionaire mind by T. Harv Eker

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