I was 18, surrounded by guys I did not know, in a city I was unfamiliar with, away from family and friends for the first time. The coach that recruited me had left almost immediately after I decided to play football there. I knew the coaches and I knew some of the guys from All-Star game and from playing against them in High School but it was different. Not saying the coaches were not helpful but they become less helpful after you have committed and if they didn’t recruit you.
I was out of my comfort zone. When my coach asked me if I understood while we were in the class room I would nod my head, we all did. When I got to the field it was clear I did not understand. I couldn’t do what was asked of me.
Logic vs Understanding
I had played football for a long time and what he said made sense and it was logical. It was a new way to do something but it made sense, in the classroom. When I got to the field to execute what we learned it was obvious I did not understand. Logic is a thought. Understanding allows an action.
Today when I talk to people about trading, need an employee to do something, or just generally explaining something I often fall into the same mistake as my coach. I mistake the nod for understanding. That nod means it makes sense, it is logical. It does not mean they can do what I ask them to do.
After being more embarrassed about not being able to DO what my coach was asking me to accomplish, than asking a question in front of my teammates, I made a change. I started to ask questions. Yes it took a little longer but I could now do what was asked of me. Not always right away but much quicker than before. As the roles are reversed today, I see the nod and I know to make the point again. If they do not ask any questions than I repeat it again. I don’t think people want to fail, but the gap between it making sense and doing is huge, especially if it something new.
How this applies to trading.
You find out what not to do in trading very quickly but there is a big lag in not doing it anymore. I will make an attempt at explaining one of the mistakes. If you have any questions please ask. This is where you can help me.
Mistake: Risking too much.
Logically this makes sense. If you risk too much you are eventually going to realize that risk. If I keep running through traffic eventually I am going to get hit by a car.
Why it is hard:
In the heat of the moment, every risk seems like a good one. If you have already loss 15k what is another $500? When you are in the moment nothing matters but opportunity. Your mind is fixated on the loss and getting it back as soon as possible. That is your single thought and motivation. The thought that should never leave your mind is to make money. But there are several ways to always make money. How can you make money?
- Not risking any more than is necessary to execute your plan. If you do not have plan and a reason for every action you will never understand what is working or how to improve. “If I had just taken more risk on that trade, I would have made $100 instead of losing $100”. If you continuously have that thought is a strong indication that you do not have a plan or know how to improve your plan. You should quit trading till you figure it out, you will fail because you do not have plan and a way to improve. You are a gambler not a trader. It would be more productive if you just burnt the money.
- Not losing more than your budget. I want every trade to work out but when it isn’t working, it is not working there is nothing I can do but lose less. The situation is not optimal for me to make money. But it has been proven to me that for every time there is a shitty opportunity there is a good opportunity. The problem for most people is they can’t see past that moment. You have to shift your thoughts from making a trade to making a good trade. It is hard in the beginning because you do not have a long enough time horizon (you want to be the CEO the first day at your new job with no or limited experience) and you lost too much on the shitty trades. The less money you lose in shitty trades the more you will have when it is good. HAVE BULLETS WHEN THE FISH SHOW UP IN THE BARREL.
- Learning. Trading requires relentless learning, that is where the real pressure of trading comes from. Things are changing all of the time. If you do not have a process to adapt, learning is too hard. But those adjustments can save you a lot of money and will make you a lot of money. Anyone can make money on a trade most do not know how to keep it.
- Execution. The last way you can make money is through profits. This is the obvious one and the one that many traders only think about. Until you figure out how to lose you will never get to keep the money. There are three types of profits. Money you borrow (you made it from taking a trade that is not repeatable or can be learned from. You will eventually pay that back with interest at an interest rate that a loan shark would consider unethical), money that pays down debits (this money goes to paying for your past mistakes or figuring out what you did not know), and money you keep (money from executing a trade that is repeatable and can be learned from after you paid off your debit).
If you have spent a lot of money learning what you do not know the following tips are for you.
- Divide up the mountain. If you are down 15k it is impossible to feel good about making $200. If you have lost that much, without ever making money before, anything but making 15k will be a disappointment. When you are in a hole that is the worst time to think about it that way. What you need to do is divide the mountain into hills, specifically 15, 1k hills or 30, 500 hills. This not only makes you feel like you are making progress it forces you to realize how much a dollar is worth. Lets say your goal is to make the first hill in two weeks. Now the next time you are tempted to doing something stupid, that wont be 1k it will be two weeks. Losing money is a stronger motivation than making money. Retrain yourself.
- Get time on your side. If you are down to your last bit, you are almost always going to fail. This is because the margin for error is really tight. You are going to have a blow up. Hopefully it is small but it wont be, your account will be gone. Your goal is to last as long as possible, this will teach you a lot. The next time you have money to trade again you will need those experiences and lessons. (I am not trying to be a downer that is just what happens. It happens because you did not respect trading in the first place or you would not have risked too much in the first place. You would have made the adjustments earlier. This is an extra warning. Now is time to have a sense of urgency instead of being resigned to failure.)
We would really appreciate your feedback, if you like, hate, or think we are full of crap. Please leave a comment, a voice mail (312) 725-9121, email info @ traderhabits (dot) com or twitter, stocktwits, youtube and facebook. Subscribe to Traderhabits by email or to newsletter.