Trading and your locus of control

When I mentor a trader, I focus on three elements:

• The system of determining entries and exits;
• Risk management;
• Developing the correct mindset.

The system part concentrates on the trend following approach. The other two elements obviously can be applied to any type of trading. I will also say that, even if you had the best trading system out there, if you used poor risk control and/or had a poor mindset, then at best you struggle to make money, and at worst you will blow up your account. That's how important those elements are.

The concept of the locus of control was developed by Julian Rotter in the 1950's, and refers to the extent to which individuals believe that they can control events that affect them.

There are two types of locus of control: external and internal.

Typical external locus of control issues are as follows:

• Blaming outside factors that you cannot control for poor results (broker, market commentators, providers of 'hot tips', trading platform, other traders);
• Having the belief that performance ultimately comes down to whether you have good or bad luck;
• Struggling to deal with adversity (e.g. a run of losses, even if they fall within expected parameters);
• Generally having an outlook that is pessimistic or negative (glass half empty);
• Suffering from a lack of belief in their abilities.

If you have an internal locus of control then you will exhibit the following attributes:

• Belief that you have the resources, skill and abilities to succeed;
• The ability to take full responsibility for their own results and performance;
• Will take or accept credit for their success, which is down to hard work, persistence and effort;
• Have the ability to accept losses, on the proviso that they did not lose control of the areas that they can control;
• Accept you cannot control or influence the market, and make allowances for that (i.e. by using good risk control);
• Generally have a positive outlook on life (glass half full);
• Have confidence in your ability;
• Belief that in the long run, their success is not down to luck.

Those issues exhibited by someone who has an external locus of control are limiting beliefs, possibly shaped by past experiences, or by what others have said to them.

People who have an external locus of control generally also have low self-esteem, and those with an internal locus of control have high self-esteem.

Based on the above, it goes without saying that those individuals who have an internal locus of control are more successful.

The good thing is that those beliefs listed above is just that - they are only beliefs. They can be changed. But that means that people have to be willing to accept change.

Working with other traders in the mentoring programme, I can come across people who start out with an external locus of control. This can be due to having suffered trading losses in the past (maybe big losses). Therefore, they may have low self-esteem. Part of what I try and do is help people to change their beliefs so that they end up with an internal locus of control. Those that can do this tend to be those who get the best results.

The interesting part of all this is that people tend to contact me as a result of reading the blog and looking at the performance achieved. They are initially focusing on the system part. After a while however, they learn to realise that the way you determine your entries and exits is only a small element of trading successfully, and that the other two aspects are more critical to achieving the results they desire in the long run.