8 min read

[Expert] The Ultimate Guide To The Mental Game Of Trading – A Portfolio Manager Explains

The following article is a guestpost by Bruce Bower. Bruce Bower manages a portfolio of emerging market equities at a hedge fund. He has a keen interest in markets, psychology and self-development, having trained as a hypnotherapist and he regularly publishes articles on his site, Howoftrading.com.


Achieving peak performance in the markets is hard. It takes the same effort as in any skillful, demanding field. You need to devote years of practice and effort to mold yourself into the best performer possible.


The mental game is one of the least appreciated aspects of what sets peak performers apart from everyone else. Most people already recognize that the best performers are doing something different upstairs from everyone else. Whether you call it “the mindset of a champion” or “iron-clad will”, we recognize that people need amazing determination to be the best in any field. If we want to reach the very top in a field, then we will want to learn to cultivate that mindset as well.


But that’s just one side of it. The more that we study peak performers, the more we realize that they are using a variety of very sophisticated psychological tools to raise their game. They know how to get in the zone whenever they want; how to bounce back from failure; how to implant success in their brains. This toolkit is an enormous asset in any field, and especially in the markets, which is primarily mental.


How does the mental game integrate with trading and investing? And do we use that understanding to develop into the best traders and investors possible?


In my book Peak Performance Trading and Investing, I discuss a program for developing peak performance in the markets. The basic idea is that we develop peak performance in the markets just like we would develop peak performance in another field, like athletics. It takes thousands of hours of practice and training to develop into the best trader and investor possible. The skill that we are developing is making good risk/reward decisions. We hone that skill just like we would any skill that we’re training up.


In the book, I codified this as three separate parts:

  1. Plan the Trade
  2. Trade the Plan
  3. Review and Tweak


The first three is probably the most important for anyone who is beginning. As Benjamin Franklin quipped, “Failing to plan is planning to fail”. You need a solid plan for many reasons: to stay consistent in your decision-making; to have a filter that permits you to pay attention to only the most important information; and to avoid any of the decision-making pitfalls that hums are susceptible to. We need to have a solid plan and internalize it.


Trade the Plan is really about taking that plan and carrying it out effectively. Plans are useless if you aren’t able to execute them as designed. In the markets, you will probably make your best decisions as the result of calm, considered reflection, not at the spur of the moment. The key challenge is to do the right thing at the right time. This means adhering to your plan in terms of when to get into positions and out of them; managing risk; and cutting losses. If you have a well thought-out plan and can learn to trade your plan well, then you should be on the path to success.


Review/Tweak is a necessary component of success in any field that demands skill. Top performers are constantly reviewing their work, looking for small changes that they can make, and then testing them out. Top athletes are always reviewing their past performances, thinking about what they can do better. We are the same. This step helps us to do two things: to catch when we are not sticking to our plan and need to tighten up our discipline; and to review and tweak the plan itself, to generate optimum performance.


The mental game is most important here. Most of the time, our issues in the market arise because we don’t stick to the plan. We set a stop loss, and then we don’t do anything as a position blows right through it. We want to put on a position, and then we get greedy and put on three times the size. A lot of “trading psychology” issues actually come down to basic discipline: we don’t stick to the plan. We only discover this when we are reviewing and grading ourselves on how well we stuck to the plan. But what mental paths can we pursue to make sure that we stick to the plan?


The first is to rethink what we are doing. Usually, we are trying too hard make money in the markets. Yes, that is the goal. Making money is the result of our actions. But there is an element of randomness in the markets, so we cannot determine the results all by ourselves. We cannot snap our fingers and guarantee that we make money. Instead, we control the actions that we take and the decisions that we make. If we make a series of good risk/reward decisions, then the long-term result will probably be that we make money. But since we can only control our actions, we need to tell ourselves just one thing: we are trying to make the right decision.


There are several advantages to this. The first is that we stay centered on what we can control. If we are making the right decisions all the time. i.e. ones that are consistent with a solid plan, then we are doing the right thing. If we are keeping our risk restrained, then the results will take of themselves over time. If we just ask ourselves “is this the right decision”, then we are going to be making better decisions. The other boost is that we are dialing the emotional content of our trading. When we are focusing on process and not on money, then we are removing all of the emotions that come with money. And believe me, focusing on money can lead to large emotional swings—if we lose money, then we start to think about what we could have bought with it. That clouds our judgment. By focusing on the process, we are essentially tricking ourselves out of thinking about money and removing the emotional volatility that comes with it.


Once you have refocused on the process and tweaked enough, then you should be able to reach a certain adequate level of performance. You should be profitable, have a plan that’s been tweaked to suit you and the markets, and be able to stick to that plan. But if you want to go beyond that, then the mental becomes even more important but in a different way. Instead of using it in a corrective way—i.e. trying to stick to a basic plan—you are going to use it to go to the next level.


Once you delve into peak performance, you learn that high achievers utilize many tools to get that unbeatable mental game. They are using a host of advanced psychological tools which most people don’t even know exist. They are using this toolkit to enable them to get and stay “in the zone”; to reprogram their brains for success; and to regulate their emotions. Together, these tools enable them to win the mental game and to perform at an elite level.

What are these advanced psychological tools? What can they do for us? And how can we deploy them for our benefit? Here are two tools that I wanted to highlight:



Adopting and having the right mindset accounts for a lot of success in any competitive and demanding endeavor. It is important that we adopt the mindset of a champion—to be the kind of person who keeps working away, impervious to any obstacle. The person who will persevere through any obstacle or difficulty. The kind of person who knows that champions are created through thousands of hours of effort, instead of simply being born “talented”.


The famous researcher Carol Dweck called this a Growth Mindset. In her book Mindset, she looked at people’s successes or failures school and in life. She noticed that there two predominant mindsets or attitudes about the world. The first was the Fixed Mindset, which assumed that any achievement was just a reflection of innate talent or ability. If you did well on a test, it’s because you were smart—no matter how much or how little you studied. Similarly, if you didn’t run the mile as quickly as you would like, then you tell yourself that it’s because you aren’t an athlete.

The Growth Mindset is the opposite. It holds that any success or failure is merely a reflection of the effort and attention that you devoted to the subject. If you get a good grade on a test, it’s because you studied hard and were well-prepared. If you didn’t get a good grade, then it’s because you didn’t study enough. That can be remedied by studying harder and longer.


Obviously, the Growth Mindset is what paves the way for continued success. With a Fixed Mindset, you will react to challenges by giving up. You will become frustrated by any bump in the road. By contrast, a Growth Mindset paves the way for skill development. You respond to challenges by working harder and being more determined. You try harder and keep giving it your best, until you succeed. This is the approach that we all took with an activity that we liked, but which gradually became harder as we became more involved, like Little League sports or chess.


In the markets, a Growth Mindset become even more important. Prices change all the time. No matter how good we are, we will experience losing positions, drawdowns and have to grapple with our emotions. The markets are dynamic, a place of constant changes, and we need to have a mindset that allows us to be constructive rather than to beat ourselves up if we get something wrong. In the markets, we will inevitably experience setbacks or failures—the test is how we respond or bounce back from them. And the Growth Mindset is the way to do that.

What is the best way to cultivate a Growth Mindset? The simple way is to let your interest and passion for a subject matter be in the driver’s seat. If you really have a genuine passion to be a good trader or investor, then dwell on that goal. Revel in it. Once you hit a bump in the road, remind yourself that your goal is to be the best—and that nothing will stop you. You can use any setback as a reminder to yourself to work harder and more deliberately. Just like in junior sports, you can use your passion and the challenge to motivate you to get better.


Visualization/Mental Practice

Visualization has long been an effective tool, used widely by peak performers. Listen to Arnold Schwarzenegger on how he reached the top in various spheres:

“I visualized myself being and having what it was I wanted. Before I won my first Mr. Universe title, I walked around the tournament like I owned it. I had won it so many times in my mind that there was no doubt I would win it. Then I moved on to the movies, the same thing. I visualized myself being a famous actor and earning big money. I just knew it would happen.”

The most interesting thing about visualization is how it actually works. Some people would dismiss this as fantasizing or imagining things, without any belief that it will happen. And unfortunately, there are some people who exist in the realm of fantasy. But for most people, visualization is an effective tool because of how our brains are structured. As explained in The Talent Code, Mental circuits form the first time that we perform an action, such as riding a bicycle or playing the guitar. These circuits will fire every time we perform an action, and each time the myelin coating of the circuit become stronger.  When we visualize an activity, we are performing the action in our mind—and activating the same circuit in our mind. Visualization strengthens and reinforces the day-to-day activities that we are doing. It can even be used to suggest outcomes or results that we desire.

Academic research has documented this effect. Dr. Alan Richardson, the Australian researcher, showed that those who visualized shooting free throws boosted their performance almost as much as those who just practiced shooting baskets. But obviously, the best way to use visualization and mental practice is to supplement existing skills and to enhance them. You want to be reinforcing the right mental circuits, not the wrong ones. For that reason, you should only use tools like mental practice as a complement to well-polished fundamentals. In my book Peak Performance Trading and Investing, I only discuss the mental game after I have covered the fundamentals. You should make sure you are doing the right things in the right order; how to fine-tune your methodology to make it work and work for you; and after you’ve reviewed and tweaked your game plan to remove any obvious errors.


Mental practice in the market can take two forms. The first is when you have a solid game plan or intended game plan, and you practice executing it flawlessly. You do a mental walkthrough of your workday and imagine yourself preparing diligently; you see yourself following the markets and sticking to your plan. This way, you are taking a solid plan and building upon it. You will mentally practice making good decisions, which is the way to boost your skill levels. You are reinforcing it, so that it will become easier to stick to, and in turn less likely that you will choke.


Visualization and mental practice are important and powerful ways to suggest certain outcomes and to work to make them possible. You can learn more about how to use visualization properly in my Peak Performance Trading and Investing course.


Now that you’ve been introduced to the basics of the mental game, what will you to take your trading to the next level?

By Bruce Bower | E-mail: Bruce [at] howoftrading.com

Blog: www.howoftrading.com | Twitter: @HowOfTrading

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