People are drawn to trading for various reasons, but there is one reason in particular that can set a trader up for disaster. Money! That may come as a surprise to a lot of people, but trading with the primary purpose of making money is an excellent way to become an ex-trader. A trader whose primary motivation is making money is not seeing the big picture. With a mindset that is geared only towards winning, and not losing, traders will sabotage themselves psychologically, and allow their emotions to influence their trades. This is exactly the kind of mentality that a successful trader needs to distance his or herself from.
Traders with the wrong attitude will trade recklessly, entering positions on a whim and hoping for the best. More often than not, this results in a trade that starts going south. With the “never lose money” mindset in play, the trader sits and waits for their trade to come out of the red. “If I can just break even, I’ll be happy,” they think to themselves as their position loses value. This emotional response to a losing trade becomes the norm, and every instance reinforces the very behavior that virtually guarantees that the trader will ultimately fail. Making matters worse, losing trades do sometimes become profitable trades, further reinforcing the notion that hanging onto a losing trade is the right approach. In these cases it’s the trade that controls the trader, instead of the trader controlling the trade. This is a serious problem that can easily lead the trader to unpleasant consequences such as the dreaded margin call. What might have been a small loss if executed properly, can turn into a devastating loser that is eventually liquidated for a substantial and painful loss. A well-planned trading methodology and control over one’s emotions are necessary to be successful.
Knowing when to take a loss can make the difference between a small loss and a large loss. A successful trader does not invest their emotions along with their capital. Various techniques are employed by unsuccessful traders with the hope of turning a losing trade into a winner. Some traders continue to buy more shares as their position tanks, something known in the industry as “averaging down.” These techniques sometimes work out in the trader’s favor, giving them credibility in the trader’s mind. That sets them up for disaster on the day that the trade does not come back, and they reluctantly liquidate their position for a painful loss. Respected trader Paul Tudor Jones summed it up this way: “Losers average losers.” Successful trading, whether it be day trading, intraday trading or long-term investing must be based on sound reasoning.
Success is not defined by never losing. It comes from self-realization, and a thorough understanding of what makes you want to trade. If that boils down to “making money,” then you are better off walking away from the game completely. A helpful exercise for anyone thinking of trading, and for traders who find that they are struggling, is to take the time to write down their reasons for trading. It will help uncover things that may have gone unnoticed. It is essential to understand the true motivation for trading, an exercise that will help reveal potential weaknesses that must be guarded against. It doesn't matter if you are stock trading, futures trading or commodities trading, it should be an enjoyable and engaging challenge, something that you look forward to every day – the love of the game, so to speak.
Trading can be enormously rewarding, and provide an enviable amount of freedom that not many people enjoy. Understanding that trading is about much more than the money is an essential step on the journey to becoming a successful trader.