The Power of Leveraged Mental Capital

We all know the industry statistic that 95% of traders lose money in their trading account and quit trading as a result. Basically, if you put 20 traders in a room, only 1 of them is going to be successful. That is quite a staggering statistic! In this article, we are going to discuss some of the primary reasons that traders fail, and by dealing with each of these, a trader can greatly increase their probability of finding success.

Mental Capital

If a person loses money and gives up trading, he is not quitting because he lost money. He is quitting because, psychologically, the loss was too great. A person can always work more, save more money, and refund a trading account. Thus, it is very rarely the loss of capital that actually prevents a person from continuing on the trading journey. Instead, it is a lack of mental capital.

First, let’s define mental capital. Mental capital is emotional fortitude and strength. Strong mental capital is a mind characterized by belief, faith, encouragement, etc. Weak mental capital is a mind characterized by fear, doubt, uncertainty, etc. Mental capital ebbs and flows just as physical capital. When a new trader suffers a losing trade, it usually causes not only a debit in his forex account, but oftentimes it causes a debit in his mental capital. Furthermore, if a new or developing trader experiences a string of losing trades in his trading account, this can cause mental obstacles to form in his mind that are extremely difficult to overcome.

Thus, new and developing traders should recognize that mental capital is absolutely vital to long-term trading success. If this is true, then the next logical step would be to investigate how mental capital can be increased. Do you think that Warren Buffet possesses more mental capital than a brand new trader? Of course he does. The reason is because mental capital is built over time through experiences and choice. The good news is that a strong mental state can be achieved by simply wanting it and desiring it and choosing it. And a strong mental state is established through countless experiences. Experience will breed confidence.

Preparation

Preparation is a huge key to developing confidence. New traders tend to want to trade more than they want to prepare to trade because trading is exhilarating and exciting, while preparing to trade can be boring. However, as in any professional field, preparation will lead a person to have more confidence concerning the skill they are about to execute. For example, if you conduct plenty of analysis and plan out your trade and the trade ends up being a loser, you are going to have much less of an emotional strike against you than if you simply shoot from the hip and make random entries in the forex market. Thus, preparation can immensely help build mental capital on a consistent basis.

Risk Management

One of the greatest keys to increasing mental fortitude for a new trader is to always consider the implied volatility within whichever market you are trading. Decide what percent of your account you can lose on a trade and not be affected emotionally. For most new traders, it is good to risk much less than 1% per trade. Perhaps you decide to risk just 0.25% on each trade. If you have a losing trade, it is not going to affect you as much as if you lose 2% on a trade. Therefore, your mental capital will not receive as many “debits” during your initial stages of the trading journey when you are suffering losing trades on a sometimes consistent basis.

Mental capital is essential to success in the trading journey, and new and developing traders will benefit by focusing on trying to build not only financial capital, but also mental capital.