Trading Psychology 101

Trading psychology has become a trendy term in retail circles, but it’s often misinterpreted and even misused. To paraphrase Trillium trading legend Lance Breitstein, “Most traders fail due to a lack of edge or expected value, not poor trading psychology,” as noted in Peak Performance’s recent post on Expected Value. While mindset alone can’t manufacture success, it’s essential for maintaining consistency, especially when dealing with the inevitable ups and downs of trading. Let’s break down the fundamentals of managing emotions on a professional level.

Beware The Negative Feedback Loop

The “negative feedback loop” is a trader’s worst enemy. When performance dips, it’s common for traders to get trapped in self-criticism, ultimately losing their passion for trading, feeling pressured to recover quickly, and abandoning their objective reasoning—a recipe for disaster. Successful trading requires relentless effort and a love for the craft. When you’re engaged and passionate, you’re more resilient to setbacks, allowing you to work longer with focus and embrace inspiration when it strikes. Lance Breitstein, known as one of the top intraday traders globally (see PnL curve below), champions this approach, emphasising exponential bet-sizing, expected value, and a commitment to holistic health on and off the desk. His philosophy? Every challenge should contribute to your “lifetime expected value” as a trader - a “lesson, not a mistake,” creating a positive feedback loop. Every challenge increases your expected value as a trader to be realised in the future of your career.

Your Strategy Performance Doesn’t Define Your Worth

For many, confidence rises and falls with PnL. Wins bring euphoria, while drawdowns trigger self-doubt. Without self-awareness, this emotional rollercoaster leads to a loss of objectivity, where traders start tying their value to their strategy’s immediate performance. Legendary trading author Mark Douglas once said, “Trading losses can remind you of every failure you’ve ever had.”

In truth, losses and drawdowns are part of the job - guaranteed throughout a trading career. Taking these as personal failings creates unnecessary strain and breaks the positive feedback loop needed for steady growth. Instead, view your strategy and market behavior as separate from your identity. Over a long-enough timeline, with sound risk management, even significant drawdowns will fade in relevance to your lifetime PnL.

Professional Trading Is a Relay

At Apex Capital, we focus on creating funds designed to meet specific performance objectives. For instance, our Athena fund seeks to outperform the S&P 500 with just one-third of the risk. With three traders overseeing Athena, our individual results feed into a collective outcome. We’re acutely aware that trader A’s loss affects trader B’s outcome, and vice versa. This team-oriented focus reduces the pressure of daily performance, allowing us to concentrate on managing collective success. Think of professional trading as a relay race: success relies on every member contributing positively. During drawdowns, limiting personal risk helps support teammates and strengthens the portfolio as a whole.

On an individual level, the above should reinforce that trading is a long game. Day to day performance is irrelevant. Taking on additional risk (be it extra trades, larger positions etc.) to win the battle as opposed to the war is never the solution. Allow your performance to win over time, not day to day. Thats ultimately what strategies are built for.

Backtest. Backtest. Backtest.

At Apex, we value efficiency, rapid iteration, and accountability. Often, traders focus on psychology when they’re losing, but the root cause might be an unrefined strategy rather than mindset. The solution? Backtest, backtest, backtest. Building confidence through rigorous testing and large sample sizes allows you to refine strategy execution and address weaknesses.

We favour manual backtesting as a means to perfect execution—an often overlooked component of the trading toolkit. Our preferred platform, FxReplay, enables traders to practice with historical data, honing strategies and converting performance insights into actionable metrics. Much of the success accumulated by Apex has been as a result of utilising the platform to iterate our strategies and performance (see one of our strategy iterations below). Ultimately, success is built in the hours dedicated outside of live market hours. We’re believers that strategies are ready to be deployed once traders feel that they have an unfair edge in the strategy, stemming from the hours put into backtesting.

Stick to Your Risk Model

Trading psychology is essential, but only when it’s paired with disciplined risk management. Our primary job as traders is to manage risk at the desk and to cultivate asymmetry in strategies off the desk. As the saying goes, “Take care of the losses, and the winners will take care of themselves.” With enough effort, almost any setback can be overcome - except a major blowup caused by ignoring the risk model. Risk models are tailored to a strategy’s specific vulnerabilities. For example, if a strategy is prone to consecutive losses, it may require a lower risk per trade and a model that scales down exposure after each loss. A trader’s top priority is preserving capital and keeping the door open for tomorrow, which is why we design risk models and adhere to them. The key principle here is to always prioritise coming back tomorrow. As drawdowns with high performing strategies tend to occur in clusters, additional leverage / size will not yield a positive outcome. Stick to your risk model and you will be fine (see below cheat sheet)

Key Takeaways

• Ensure that your search of psychology assistance does not stem from a lack of edge.

• Passion and happiness when working is paramount to long-term success. Beware the negative-feedback loop.

• You are not your strategy’s performance. Don’t take drawdowns personally, they are apart of the job description.

• Professional trading is a team sport. Don’t think of your trading in isolation, but rather as a small piece in your team’s portfolio. Decrease risk when in drawdown to preserve the portfolio’s alpha, and protect your downside when on winning streaks to avoid erosion.

• Confidence stems from evidence that a strategy can perform. Get the reps in by backtesting until you feel that you have an unfair edge. Backtest. Backtest. Backtest.

• Stick to your risk model. A trader’s primary function is to protect downside - prioritise coming back tomorrow.

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