By: Matthew Zimberg
Traders have to detach themselves from the money they're trading.
Everybody wants to be a profitable trader and with the advent of the internet and the growing literature about trading, most people know that the 3Ms are essential to succeed: Methodology, Money Management, and Money (capital).
Will traders be disciplined and adhere to the 3Ms? Not likely. Why? Because after all we are talking about money... and from personal experience, I can say that the majority of us are attached to money and no matter how effective our "Methodology" is, we as emotional beings will often tend to outguess our system.
- Many traders can not follow a methodology that loses 3 times in a row. Doubts will set in and consequently the trader will stop using the proven methodology and start looking elsewhere.
- Traders bypass and "adjust"' their money management technique based on their risk tolerance instead of applying the methodology's risk management. For instance, a lot of traders are enamored with Gold but will not risk more than $1000 per trade, which represents a mere $10.00 in the price of Gold. This is an unrealistic expectation given that Gold can easily move $10 to $20 from low to high on a given day.
- Traders are not necessarily investors. They often trade to supplement their income while trying to earn a living. Shouldn't an electrician do what he does best in his own field and leave the trading to the Methodology, for which he/she probably spent thousands of dollars to purchase?
By now you're probably wondering about the 3rd M (Money) and thinking why in the world am I even bothering to trade if NOT to make money? And what about all the money you spent educating yourself at seminars, reading technical books on trading? Was that all just a waste of time and money?
I'll let the reader answer that question. All I can tell you is "Trader, Know Thyself." But here's another perspective to all this: Making money is a by-product of success. What does that mean? It means that successful trading is the result of applying the 3Ms: Methodology, Money Management, and Money. There is nothing will guarantee you success, but following the 3Ms would help you to increase the odds of being a successful trader.
(PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THERE IS A RISK OF LOSS IN FUTURES TRADING)
The phrase "making money is a by-product of success" and does not include such things as "I HAVE to make money" or "I have to make the mortgage payment" and "I need to get extra cash." I think you get the picture.
I truly believe the concepts of fear and greed come to fruition when someone is trading money they can not afford to lose. So instead of taking a small loss, the undisciplined trader will let a $1000 loss turn into a $2500 loss. The truth is that trading has to encompass only risk capital. What does "risk capital" mean? It means that you need to allocate capital towards the building of your business. It has to be separate from the rest of your capital like your day to day finances, retirement capital, your children's college fund, etc.
That should help you mentally since this is theoretically money you can afford to lose. The following few facts should also be considered when trading:
- Most traders will be losers.
- Most profitable traders will be in the minority, so maximize your profit potential and don't exit too soon.
- Your methodology sometimes will not hold during certain market conditions, but if it's been tested and proven effective than stick with it.
We can all live with the winners, but to stay calm during the storm is the strength that it takes to stay in the markets and hopefully become a "trader."
Hope this helps,
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURES RESULTS. THERE IS A RISK OF LOSS IN FUTURES TRADING. FUTURES AND OPTIONS TRADING INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS.
3 thoughts on “What's profit got to do with it?”
I am also going to wait. Most system says their system works and you can make profit from it.
But unfortunately most of them don't work that well.
Well said. I heard a trader once say, the reason a lot of traders fail when moving from paper trading to real trading, even if quite successful when paper trading is because of your 3'rd M, money,. They think about the money when real trading but are not required to when paper trading.
It's like when I play cricket or golf. I seem to do my best when I don't think (or have time to think such as taking catches in cricket - if I don't get time to think about a ball coming to me because it's coming to me real quick, I almost always catch it, yet have a ball hang in the air for a few seconds, I can sometimes drop it!).
There's a great book by W. Timothy Gallwey called 'The Inner Game of Golf', and you might not think this applies to trading but it applies to everything. The author claims that the longer we have to think about making a decision or taking an action, the more likely we are to mess up, usually because a lot of the thinking is focusing on things we don't want (for example, I don't want to pull my putt to the left too far - and so what do we do, we pull the putt!)
Give 100 traders one successful trading system, and only 2-3 will make it work, and a lot of the reason is because the 97 or so are thinking about the money (yet they'll blame the system). But they are not to blame in my eyes because the whole trading industry is marketed in such a way that it is made to appear that trading is easy.
The industry needs a real shake up to get people out of this mindset that the markets are some road to riches and get them realizing that trading is a business, and that *trading* and *using the markets to achieve a goal* are two completely different things.
I WON'T TRADE IN A VACCUUM:
I'm ignoring any new sell or sidelines signals today that I get on MarketClub! I'm going to wait to see the market action after the Fed decides on interest rates cuts Wednesday afternoon!
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