In today’s Money Weekend…intense emotions…the excitement of trading…letting go…risk manager first…and more…
I have reconnected with an old school friend after many years because he has caught the trading bug and likes to have a chinwag about what’s going on.
I’m enjoying explaining a few of the truths that he will face, and hearing about his experiences as a newbie dipping his toe into shark-infested waters.
I had told him that trading at the end of the day is a journey into the depths of your own psychology, and he told me that he had experienced a few sleepless nights and high levels of anxiety in relation to a few positions that he had on.
I think the intense emotional experiences that we have while trading is a drawcard whether those experiences are positive or negative.
The sleepless nights and high anxiety aren’t enough to stop him trading altogether. He could sell out of his positions and sleep like a baby, but he won’t do that because he is enjoying the chase.
So much of life can be rather mundane.
We start life full of beans and excited by the prospect of limitless possibilities. We end up washing the dishes and watching MasterChef, wondering what on Earth happened.
The excitement of trading
Trading can be a spark plug. It ignites the passions and challenges you in every way imaginable.
Your grey matter is forced to do backflips as it tries to navigate the constant flow of conflicting information and the gyrations in your P+L become a map of your emotions.
If you didn’t feel alive before, you certainly do now.
But trading the markets is a dangerous place to search for excitement.
It is our lack of knowledge about how we actually behave under stressful conditions that usually ends up shifting the experience from one of excitement to one that is incredibly painful and debilitating.
Watching yourself spiral down into oblivion, making one bad decision after another until either your account is drained, or you have the sense to stop, can be a confronting experience.
Telling yourself you’ll never be silly enough to do something like that again and then ending up in exactly the same spot a few months later is confounding.
There is no one to blame but yourself and the same cycle will happen again and again, for years if necessary, until a major shift in approach occurs.
How to Limit Your Risks While Trading Volatile Stocks. Learn more.
That shift is something I have mentioned in many articles in the past. You have to let go of your false belief that you know what’s going on and can predict the future.
What’s going on in your head at any moment has little to do with what’s actually happening in the market.
Every article you read by an expert (including me) is just a guess when they say that market ‘X’ did this because ‘Y’ happened.
It all sounds very convincing when an expert in a suit and tie gives their nightly round-up of the day’s trading and points out why they remain extremely bullish or bearish.
Look back a few months later and odds are they will be proven completely wrong. But no one ever reviews comments made six months ago. There is zero accountability.
I get things wrong all the time.
I used to make up excuses to placate my ego. I’d say the reason why the market wasn’t moving in the direction I thought it should move in was because the US Fed is pumping the market up with printed money.
That may be true.
But I thought it should go down and it went up.
I was wrong.
The less views you have of what you think will happen in the future, the less chance you have of being disappointed.
Where the market goes is where it goes.
You have to find a way to make money whatever happens.
Risk manager first
The only way I have found to move forward rather than backwards is to accept that I am a risk manager first and a trader second.
If I have risk management at the top of the totem pole, everything else flows quite nicely from it.
I would rather forego potential upside to know for sure that I will survive.
That involves taking profits when you’d rather be buying more. It involves sitting on your hands and doing nothing when opportunities are scarce.
It means entering smaller positions than you’d like to so that you are rarely putting yourself under extreme pressure.
In other words, it involves making trading less exciting.
Don’t worry, the heart still jumps around as markets fly around and the grey matter is still going hammer and tongs at all times.
But there is more time spent researching companies before I pull the trigger. Less time spent watching the screens and dreaming about what might be.
There is satisfaction in seeing the long-term trading stats sit around expectations. The joy is in seeing a lack of volatility in my P+L, rather than being elated when it’s rising and despairing as it falls.
If you are searching for excitement, you should probably take up bungee jumping rather than trading.
For Money Weekend
PS: Our publication Money Morning is a fantastic place to start on your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here