When traders talk about “creating your mental edge” what does it mean and how do you go about accomplishing that?

 

Your mental edge is the edge that you display over your competition through discipline and intelligent trading. And there are really two main competitors that you’ll face.

 

The first is the rest of the investing herd. This is everyone else that’s out there trading in the same market that you are, and they could be friends, family, institutional firms, or someone in a hut on the other side of the world. Let’s not kid each other, each and every one of them would be happy to take money from your account to fund theirs. When you win a trade, someone else is on the other side of it in a losing position. When I put it like this, it shocks a lot of people that are new to markets and makes it sound really evil and Machiavellian, like successful trading is the art of screwing other people. But this is the way that financial markets work, there is a winner for every trade, and you have to find ways to get that edge over your competitor.

 

Look guys, I get the idea that we should all work together to build out the space for the greater good, and support the good projects. And to some degree, that’s really the mandate of the fundamental, HODL investor who is committed to the space for decades and has a very long time horizon.

 

But if you have a small account with a shorter time horizon, then you’re going to have to trade assets against others to grow your account to where you want it to be, so that you can make it big enough to make a dent in your future plans.

 

And I’m here to say that if you trade along with the ideas and direction as everyone else, then you will get the same results – or worse – than the rest of the market. The financial markets reward original thinkers, ones that are willing to go against the pack, or in this case the school. Going against the herd with original ideas is where the edge and positive returns are. You want to be the shark swimming the waters, and not just another fish in the school. .

 

And this will be extraordinarily difficult for you to do at first, because in today’s social media world we are used to socializing our decision-making. We look at others’ reviews for items like clothes or restaurants before we purchase those goods. We implicitly trust opinion from the masses. This is good if you want to save some time researching the best pen to buy, but this is financial suicide if you want to create edge as a trader.

 

You see, the biggest price moves that you’ll see are when the investing herd is caught off-guard and they begin to show fear. Fear manifests itself into markets in a couple of ways; first off, there is the Fear of Missing Out, or FOMO. This is when a market is screaming higher and there is a genuine fear that you missed the boat.

 

For context, look at the Bitcoin move in December of 2017. It’s a proven fact that the pain that one experiences sitting on the sideline while a move goes on without them is far greater than actually taking a stop-out on a trade.

 

Eventually the fear of missing out becomes so strong that you buy in at the very top, along with all of your friends that were feeling the same way, most of whom were influenced by social media posts celebrating someone else’s paper gains. Can you see that this does not provide any edge when you trade in this manner?

 

The second way that fear manifests itself in the herd is during pullbacks or sell-offs. This is where people panic and sell, usually at the bottom of the move, like in February or November 2018. The motivation here is self-preservation, as the assumption is that the price is never to return to the former highs, and is called Fear of Loss.

 

You can find example after example online of traders who bought the highs and sold out at the lows. Everyone does the same thing, because we’ve all received the same childhood conditioning that “risk = bad” as well as everyone else inflaming everyone else’s fears in social media.

 

I hope you can see that trading along with everyone else gives you no edge whatsoever against the rest of the market. In fact, it nearly guarantees that you’ll have mediocre – or worse – returns.

 

The second competitor that you’ll face, and perhaps your toughest one, is you. I have a saying that I repeat constantly; you’re not really trading versus the market, you’re trading versus yourself. So let’s say that you take my advice and stay out of the social media sites and away from the click-bait news sites that influence the herd. You still have to deal with yourself and your own fears. How do you accomplish that?  

 

I believe that the default behavior is to act like the herd by fomo’ing into the highs and selling on the pullbacks. The only way that you change this behavior and start to achieve exceptional performance is to trade according to your plan, no matter what. You put your trading plan together when things were not emotional, when you were calm and rational. But now a big market move is putting that discipline to the test. Will you succumb to your emotions? Or follow the plan?

 

I know that a trader has turned the corner when they are able to stare down “fear” in the face, put the blinders on and follow their plan. Usually the outcome is rewarding, even if it doesn’t feel like it in that moment and they are full of doubt.

 

But if you’re able to withstand the temptations to trade emotionally, and instead follow your plan to completion, a profitable result will fill you with resolve and pride and starts you on your journey as a profitable trader.

 

I always say that the very best trade setups are the ones that feel absolutely terrible to enter.

 

And that’s because we’re acting independently, we’re going against the crowd.

 

When you are able to accomplish this, regardless of the eventual result, then you know you are well on the way to achieving the mental edge that you need to effectively trade a small account.

 

Let’s summarize: To be successful trading a small account, you need a mental edge vs everyone else. .

 

The first thing that you need to do is to stop socializing your trade ideas by learning to think independently. Yes, this might be a tall task if you’re inexperienced, but following all ten modules of my new “Trading a Small Account” course in order will give you the structure to begin this process.

 

And lastly, to be successful trading a small account, you need to think of your emotions and your conditioned, impulsive responses as another “opponent” to conquer. And that can only be accomplished by learning to follow a trading plan to the letter, and not give into fear.