I’m often asked how I manage to make a living out of trading. The truth is I don’t. I don’t make my living just out of trading, not all the time at least. One of the reasons I see people fail, and fail spectacularly, is that they invest all their time, resources and funds into one activity. Whether it's trading or selling bananas on the side of the road, there’s an old adage the stands true – don’t put all your eggs in one basket. As you shouldn’t put all your account balance into one position, you shouldn’t put all your money into trading alone. What you end up doing is putting unnecessary pressure on your trading and mixing emotion with strategy.
You might blame your lack of trading success on the fact that you have yet to come across some stunning strategy or analysis. Let me tell you now, no one strategy or indicator is going to make you a millionaire overnight. If that was the case Warren Buffet would have gone home a long time ago. But you still see him out there, working away at his multiple ventures. Where people often go wrong, time and time again, is placing the pressure of “I have to succeed or go bust” on their trading.
Here are some typical traps that many traders fall into when they invest more than they can afford.
Starting with a ‘loss’
A very common factor that applies a lot of pressure on traders is using money they can’t afford to lose for their trading. You may have heard stories of people who traded with loans, or money intended for important purchases, and ended with tragic consequences. Taking a loan is the very last option (if at all) to finance a trading account. Using your essential-to-living funds sees you unavoidably attach an emotional factor to your trading positions as a loss could mean big trouble.
If you can’t afford losing any of your hard-earned cash on trading, I suggest that you stay away from live trading for now. Only use disposable income, money you can afford to lose, to trade. And until that time comes – trade on a demo account and gain valuable experience.
One-way street to success
Sometimes the desire to succeed can be a case of make or break. This is true in many parts of life as well as your trading. Let’s look at a real-life example of Paul, a small business owner. Paul is close to 60 and opens up a small textile making factory by investing all of the hard-earned savings he’s made over the years. Although retirement is only a few years away for him, he decided that it would be a good idea to use his savings to open the factory with a view that it would return some profits over the next few years. But as the months pass by, the business fails to at least break and Paul begins to feel increasing amounts of pressure. The reason why he is feeling the heat is because he placed himself in a situation where he invested all of his savings in that business and the possibility of failure for him is as good as going bankrupt.
You can see the same story play out with market traders. If you constantly tell yourself that making profit through trading is a one-way street to securing your financial future, then it also means that you put a disproportionate amount of pressure on your trading. One of the reasons that successful traders manage to reach as high as they do is due to their ability to avoid that stress. The ideal is to wait until you save enough funds that you can put aside to exclusively trade with, without any losses impacting the quality of your lifestyle.
It is vital to remove yourself from any emotional attachments to the risk capital from day one. This is only possible by assigning that amount of money for trading purposes only, and use no funds intended for paying bills, mortgages, or even for future life savings. And you need to have a backup plan of earning money for your or your family’s expenses. I know it may seem like a paradox, because trading usually attracts people who don’t have the finances at their disposal to trade. But make sure that you can afford to lose your risk capital, as only then can you protect yourself from the emotional pressure to deliver profits.
Sustaining significant losses
Have you ever met anyone that continues to put large amounts of money into a losing enterprise or business? Not willing to lose his initial investment, he continues to pump in more money even after experiencing multiple loses. A trader’s account can also take similar hits with sizeable losses due to poor money management.
I’ve seen traders begin with small trading accounts expecting to grow their funds by large amounts, quickly. The resultant psychological pressure they place on themselves sees them either over-trading or taking excessive risks. Or, even worse, doing both. Don’t get me wrong, it’s natural for a trader to look for ways of expanding his small trading account. But the problem appears when they set unrealistically short time periods of turning their small accounts into large ones.
Setting yourself unrealistic targets like tripling your account’s value in two months or planning to resign from work to trade full time in two few months’ time, can be a dangerous thing to do. Here are two scenarios of how you might be thinking about your trading:
“Given that I start with a small trading account, it’s important to open small-sized positions and grow my account slowly. If I take on too much risk I might wipe out my account and instead of having this small trading account I will be left with nothing.”
Or: “Even though I have this small account, all I need are a few big wins from my next trading positions and once I triple those funds I will lay back and follow a proper trading strategy.”
I don’t need to look into a crystal ball to see the future of these two traders. The first scenario is someone with a healthy mindset. But a lot of traders with small accounts often go down the path of the second scenario. The temptation to make big money fast is pretty hard to resist. In all my years as a trader and trainer in both the banking and retail environments, I’ve come to learn that small and steady wins lead to a more successful and reliable approach to developing a long term trading practice.
If you start with a small trading account you need to understand that success comes slowly and that you should be applying sensible account management from day one. Even though it might take some time, moderate trading gives you the opportunity to practice your trading. See what works and what doesn’t. You are stretching out the funds in your account balance so you have the time to evolve into a more profitable trader. Your other option is to throw yourself into an uncontrolled trading frenzy with a view to get rich fast and end up with an empty account and maybe even damage parts of your personal life. I don’t recommend that!
Being educated and experienced: Priceless
Trading with a live account without having either the proper education or experience is a notoriously common way of adding undue stress on your trades. Carrying out any type of task without fortifying yourself with knowledge, or experience, inherently adds pressure because it is simply more difficult to carry out that task. Imagine having to save someone’s life by administering CPR without any training – the pressure is huge. However, a well-trained individual is confident and disciplined enough to focus clearly and coolly on the task at hand.
Okay, it may seem like a bit of a dramatic comparison, but some people risk so much and place such huge pressure on themselves to succeed in their trading that it inevitably unravels in their hands. With the right education and mindset you can become a successful trader. Avoid the pitfalls of placing large amounts of pressure on yourself and control your trading.
Choose to become a well trained and experienced market participant that can handle your trades calmly and dispassionately, like the professionals.
Author: Avramis Despotis, Founder & CEO, Tradepedia
Founder and CEO Tradepedia An enthusiastic educator, authoritative voice in price action trading and inspiring personal coach, Avramis Despotis has been immersed in the financial markets for over two decades. Founder and CEO of Tradepedia, he is an expert instructor in technical analysis, risk management and behavioural finance and has mentored over 40,000 private and institutional traders. He is regularly called upon by top-tier global firms to provide expert-level training to their top traders, fund managers and risk assessors. Some of his satisfied clients include Reuters, HSBC, Deutsche Bank, Saxo Bank, Barclays Bank, MetaStock, Interarab Cambist Association (ICA), The Financial Markets Association (ACI), Kuwait Financial Markets Association, National Commercial Bank, BNP Paribas, Société Générale, Arab Bank, Emirates NBD, Abu Dhabi National Bank, Menacorp, FxPro, ADSS, XM.COM and many more. Avramis is a Certified Financial Technician from the International Federation of Technical Analysts, a member of the British Society of Technical Analysts, is certified for Portfolio Management and Own Account Trading and holds an MSc. in Finance. With a decade of interbank experience, in 2009 he founded Tradepedia, and currently heads a team of 20 instructors spanning Latin America, Europe, the Middle East and Asia providing education, automated software, market reports and signals to help private and institutional traders make sound well-informed decisions.
