If you have your hard-earned money on the line in your trading account and you feel like you HAVE to make money from your trading, you’re screwed, to put it bluntly. The single biggest reason you’re not making a living trading is because you feel like you have to making a living and you’ve gone ‘all in’ with your capital and emotion.
What do you think is the root cause of why you are unable to make a living as a trader? You might think it’s because you have not yet discovered some ‘amazing’ trading system or maybe it’s a special combination of secrets that you think will punch your ticket to trading success. I assure you that it is neither of these and it’s probably not because of anything else you might be thinking of right now. The cold, hard truth is that what is really stopping you from making a living trading is simply the self-inflicted pressure to make money.
The following four points discuss the major mistakes that many traders make which result in an amount of self-inflicted pressure that is too much for them to overcome:
1. Bleeding “chips”
In poker, if your chip stack starts taking big hits, it’s called “bleeding chips”. In trading, this is the same thing as not having enough capital to see us through so that we can see our trading strategy play out over a long enough period of time to make us money.
Traders who start with very small trading accounts tend to put unnecessary amounts of pressure on themselves to build their accounts fast. This obviously manifests itself in the forum of over-trading and risking too much per trade. There’s nothing wrong with starting with a small trading account and trying to grow your small account into a bigger one. The problem comes in when traders have unrealistic expectations about how long it will take them to grow their small accounts. Once you start thinking about doubling or tripling your small account in a month and dreaming about quitting your job in two months to trade full-time, you have pretty much sealed your own fate as a losing trader. The good news is that it doesn’t have to be this way, you have options…
If you don’t have a lot of capital to fund your account with, you basically have two ways of thinking about your trading:
1. “I understand I don’t have a lot of capital to trade with and I understand this means I must trade smaller position sizes for now because I know that if I don’t control my risk I will eventually blow out my trading account, which is even worse than having a small trading account.”
2. “I know my account is small, but I think if I can just hit a few big winners here and there and double or triple my account, I will be sitting pretty and then I can start managing my risk properly.”
Now, you probably already know that the first line of thinking is the right one, but most traders tend to think like the second one, especially traders with small trading accounts. The temptation to try and build your account really fast, is very difficult to overcome. But, as I discussed in my Tortoise vs. The Hare article from last week, slow and steady really does win the marathon of trading, and no matter what you think or what you want to believe, this will always hold true.
Thus, if you are under-capitalized, you are going to have to accept your reality for now and trade slowly, with proper risk management. You can build a small account successfully, yes it will take time, but the more you develop the proper trading habits, the easier trading will become for you and the more profitable it will become. The alternative is basically an emotional roller coaster of trading that almost inevitably ends up in blown out trading accounts and possibly even destroyed relationships in your personal life.
2. Scared money
The next thing that induces pressure on a trader, and even more so than being under-capitalized as we discussed above, is trading with ‘scared’ money. By scared money, I mean money you really should not be risking in the market or money that might not even be yours. I know that many beginning traders try to trade with loans from family or even credit cards, and quite frankly this is just beyond insane.
Trading is the LAST thing you should even consider using a loan for. Trading with ‘scared money’ means that you have a greater than normal emotional attachment to the money you are risking in the market, because you know that losing it will have dire consequences. Too often, I get emails from people who are clearly trading with scared money.
If you really can’t afford to risk real money in the market, then you need to “man-up” and accept this reality and not trade live until your reality changes. You can learn how to trade and demo trade in the meantime, but trading with scared money is almost the same thing as taking that money, pouring gasoline all over it and throwing a match on it, because you are almost guaranteed to lose it in the market.
3. The pressure of needing to succeed
It is not at all uncommon for business owners to fail because they start from a point of needing their business to succeed. Think of the restaurant owner who has invested all of his life savings into a new restaurant venture at the age of 55. He is getting close to retirement and thought investing all his money in a restaurant would be a good way to earn some extra money as he gets older. When the business comes limping out of the gate and he is struggling to breakeven every month, the pressure quickly begins swelling up to intolerable proportions. Why? Because he painted himself into a corner, so to speak…he put ALL his money into one business and put himself into a position where failure would essentially mean bankruptcy.
The above scenario happens a lot in the restaurant industry and other industries, it also happens A LOT in trading.
If you wake up every day and think about your trading as a “do or die” venture, as your only source of income or financial security into the future, you are creating HUGE mental pressures that even the most disciplined and patient trader could not overcome.
Successful traders have gotten to the point they are at BECAUSE they understood this ‘pressure’ concept and they figured out a way to relieve the pressure. This might mean they waited to start trading live until they had enough risk capital to unemotionally do so, or it might mean that they remained realistic about their small trading account long enough to build it up to a nice level over time, through proper risk management, aka discipline. Whatever the route they took, any professional trader got there because they figured out a way to significantly reduce or eliminate any type of pressure of needing their trading to succeed.
You have to trade from a clean and clear trading mindset with virtually no attachment to the money you have at risk. You can only do this by having a solid plan B to fall back on, like a job that covers your bills in addition to allowing you to save some extra money each month. Trading is inherently risky, and it tends to attract people who can’t afford to trade or who have dollar signs in their eyes, yet it only rewards those who can afford to trade and don’t have dollar signs in their eyes. You have to make sure you are in the latter category, not the former. If you are not in the correct pressure-free mindset, then do not start trading with real money until you have devised a way to get yourself into that mindset.
4. Not enough experience or education
Finally, perhaps the most common way that traders put unnecessary amounts of pressure on themselves in the market, is by simply trading live without enough experience or education.
When we try to do things without proper experience or education, there is inherently a certain amount of pressure on us, simply because the thing seems much more difficult than it otherwise would be if we had that education and experience. For example, think of trying to perform surgery on someone without being properly trained as a surgeon, you clearly would feel an immense amount of pressure, whereas a trained and experienced surgeon probably feels very little. This is why people have to go to school so long to be doctors, and go through a lot of training with an experienced mentor before they perform their own surgeries. You would not want an inexperienced doctor operating on you or an inexperienced pilot flying the airplane you’re riding on!
Similarly, traders who try trading with real money, without having first obtained proper training and experience, tend to feel much more pressure and emotion than they would if they had a solid trading education under their belt and 3 to 6 months of demo trading. Many traders try to trade with a live account and “learn as they go”, or so they think. This inevitably leads to them blowing out their trading account. I get emails almost every day from traders telling me that AFTER they start making some money in the market THEN they will get a trading education and learn how to trade properly. Trading is no different than any other profession in that you NEED the education and experience FIRST. It is borderline lunacy to think you are going to step into the market with little to no experience or education and start making consistent money right away. Just as you would not step into the cockpit of an airplane with little to no experience and expect to fly the plane, you cannot trade properly and without massive amounts of pressure and stress if you do not first get training and experience on how to trade properly.
Education is the first solution to the pressure that is stopping you from trading for a living, just as education is the first solution to almost any other problem in life.