Traders do not make money on every trade, most don’t even make money on half their trades. It is not like other careers, jobs, or hobbies where you learn how to do something then simply work hard and then get paid. A trader in the financial markets pursuit of profits is more like the life of an entrepreneur. Our entry signal may lead to a profit or it may not. The stock, option, or futures contract we just bought may go up in value or it may fall. After many years of hard work we may have enough capital to pay off our house or lose $50,000 of our hard earned money. We may become a millionaire in a runaway bull market or waste five years of hard work with nothing to show for it.
Trading is like many other new businesses where it takes time to see the reward for your effort. In addition the difficulty of profitably trading a system the barrier between the new trader and profits can be pain. A trader has to manage the mental pain of trading when he does everything right but still loses money. A losing streak will amplify the pain of losing. Pain management and the perseverance through the pain is the pathway to getting to the top 10% of long term profitable traders.
Here are 10 painful aspects of trading and what to do about them.
- The pain of losing money. (Trade smaller so it is much less painful, and just one trade out of your next 100 trades.)
- The pain of being wrong about a trade you were sure about. (You lost simply because the market wasn’t conducive to your particular trade, trend followers lose money in choppy markets, swing traders lose money in trending markets, the market picks the particular winning trade not you.)
- The pain of a draw down in capital.(Even the world’s best money managers do not continually hit all time equity highs. Your path may look like this $10,000 to $20,000 to $15,000 to $25,000 back to $20,000 then up to $30,000 and then the climb into six figures and beyond over time. Be comfortable enough with your risk management to be able to ride your own equity curve long term.)
- Consecutive trading losses hurt. They make you doubt yourself, your method, and your system. (You need to remember your winning trades, your winning years, or your proof in back-testing, or paper trading of your method’s profitably.)
- The embarrassment of public losses. You told everyone who would listen about a great trade, and you were wrong. (Never be overconfident in any trade, but always be sure of your stop loss. Always be uncertain in your trade winning or losing, just follow your plan.)
- The pain of admitting you were wrong. (Cut your loss and move on to the next trade, trade reality not your ego.)
- Losing paper profits, you are up $1,000 on a trade then a massive whip saw takes back those profits in one move and you end up back at even on the trade. (Take your trailing stop and move on to the next trade, there is truly no reason to cry over spilt milk.)
- You are following a guru and come to realize he can not predict the future, no one can. (You stop following gurus and look to learn how to trade a systematic process.)
- You take a position that meets all your entry guidelines and then it hits your stop loss. (Follow your plan, exit the trade, and say “next”)
- You start trading a system that did amazing in back-testing and promptly lose 10% of your account in a draw down. (You have to double check to see if you made any mistakes in your research, if the method is valid then stick with it so it can win in the long term, you may need to make slight adjustments in position sizing or stops to account for volatility that you may have missed.)
Whatever the pain, just don’t quit, there are great rewards to be found in trading right over the long term, but you have to enjoy the game and the journey.