“To Trade Successfully, you need to explore your relationship with money” – Van Tharp

Why did you get interested in trading? Was it because of a genuine interest in macroeconomics or the financial markets, or was it purely to “get rich”?  It may be of no surprise that most people attempt to trade because they are tired of their day jobs and want an easier way to make money. Or some version of that – perhaps they want to trade around their day job to make more money. Perhaps they want to be able to retire early on an island. All of these reasons have one common denominator: money is the main focus.

I believe that one of the main reasons for failure, in trading, is this constant focus on the money. In my experience, the more you concentrate on your monetary goals, the less money you are likely to make. Your focus will be inevitably distorted. The best traders I personally know share these common traits:

  • they have a genuine interest in the markets & in what is happening around the world
  • they are 100% focused on playing the game correctly
  • they don’t “need” the money
  • they are disciplined and have been or are self-employed or business owners (hence possessing an entrepreneurial mindset)
  • they are patient and self-aware

Money is simply a by-product of their efforts.

Greed is not good

An old broker adage says “90% of traders lose 90% of their capital in 90 days”.  I’m sure that’s not always the case, but amongst day traders around 40% don’t make it into their second month. Over a three year period, only around 10% of traders are still in the game. I believe that money has everything to do with these statistics.

But to make matters  completely relevant, I’ll tell you a story about a student of mine who we will call MoneyMan. I took on MoneyMan as a student because he ticked all the boxes:

  • he had a genuine interest in the markets
  • he had a job that allowed for a comfortable lifestyle
  • he had capital to risk (so he could actually afford to trade)
  • he was self-employed

So he had the time and the capital to succeed in his trading endeavours. I started working with him in order to enhance his trading skills and get a feeling for where he was getting stuck. Here is what happened during a 6 month period:

MoneyMan’s Equity Curve – essentially treading water, despite being able to perform admirably

There are four distinct drawdown periods. Is this due to market dynamics or something external?

Not at all. Near the trough of these drawdowns, I would receive a meeting request that always went like this:

“You know I was doing great, I was focused and the results were fantastic. So then I tried to push myself…I raised my position sizes and tried to reach certain financial objectives. And then I just started getting wiped out.”

What is going on here? The answer is: MONEY. Money slipped into the equation. My student had remained disciplined and focused, but his good results got to his head and he started to dream about Ferraris and buying a small Island in Greece. His focus turned from the process towards the money he could potentially make and ho he could spend the money to enhance his lifestyle.

How can you possibly follow proper trading principles, if you are emotionally involved because you have a large stake on the table, or are entering numerous trades each day (perhaps attempting some form of revenge trading). A side-effect of this is that with all the focus on the potential profits, any consideration for the potential risks to the trade go out the window. In my experience, traders that get emotional over their wins & losses is usually due to position sizes that could generate too great of a loss in the event of a stop out.

Another side effect of money being the main focus, is that your mental energy is not spent trying to learn how to play the game well, and maintaining discipline. Your mental energy is all spent trying to tame your emotions. Instead of trading, you are effectively gambling.

The Cure: how to focus on the process

“Psychology is, quite possibly, the most important thing” – Tom Basso

One of the reasons I fully understand MoneyMan, is that I’ve been there too. When I started my trading career, I made many mistakes. One of the worst mistakes was not having any side income. So naturally, money was at the top of my priorities. Hence, each trade was super-important…and I couldn’t simply let losses be “just losses”. They weighed a lot more because, after all, “I’m supposed to make money trading” and not “lose money trading”. Short-sightedness takes hold of your mind and the fact that trading is a marathon and not a sprint, goes out the window, when money is the reason behind your desire to trade.

Let me share with you all, what I shared with MoneyMan. May these pointers help you as well.

  1. Invest in your education. Learn or build a trading strategy you really believe in – Make no mistake: the only way to succeed in this business is to learn how to trade. Invest in yourself, go through our Workshop or see if coaching fits your needs. Without a time-tested approach that you believe in, you will not be able to succeed.
  1. Trade around your day job, or at least have other income streams– This will keep the psychological pressure off, and it will allow you to enjoy life while you learn the tools of the trade. It typically takes anywhere from 12 to 18 months (if starting from scratch) to get your footing in the markets. For experienced traders, it takes around 3 months to go from break-even to consistency with our guidance. It may take longer. Make sure you have time on your hands.
  1. You need to be passionate about the markets & about the economy – We’ve spoken about this earlier. Just like a chess player needs to enjoy the game, and be willing to learn from a boatload of losses before he can enjoy winning, you need to enjoy the process of trading. You should have some kind of interest in how the markets actually work, why they behave like they behave, what makes a good trader, what makes a good trade, etc.
  1. You need to focus more on controlling and accepting risk than dreaming of rewards – This should be straightforward: if you are fully aware of your risk, and accept that risk before actually entering a trade, you will naturally be more focused on the process of trading since you won’t be worried about the losses. Furthermore, your emotional stability will allow you to stay in the market if the trade grows legs and becomes a multi-day or multi-week runner.
  1. Remember that trading is just a small part of your everyday life – If you give trading too much importance, you will naturally be prone to emotional involvement. Remember that trading is an elaborate form of gambling. Each trade can go well or it can go sour. Your edge will only appear over a larger number of trades. In order to actually start appreciating the nature of your edge, you need to maintain focus, stick to the process. Stick to your guns, through the draw-ups and the draw-downs. Cut your losses at the knees. Hold onto the trade if the market is performing in your favour. But to do all this, you need to be somewhat detached from the outcome.

Over to You

Many traders start with financial goals, and then they set out to accomplish their goals by creating trading habits that are not in sync with actual market dynamics.

– Some traders want to make 500 USD per day. So they will naturally “LOOK” for trades during the day;

– Some traders get overconfident, and they start raising their stakes and not obeying sound money management principles;

Starting with a financial objective can derail you. A sound starting point, that has worked for me and for many of my students over the years, has been:

How can I play this game in a way that will allow me to survive forevermore?

When I was a broker, I was talking to over one hundred clients per day. It did not take long to understand who the professionals were. Through these conversations, it became apparent that:

  • unsuccessful clients were only interested in the outcome of their trades. If they lost, they would usually tell themselves some version of “it was simply a bad trade” or “the market just acted irrationally”. If they won, they would usually tell themselves some version of “it was a great trade I chose”. These traders were only focused on the result. They completely missed the learning process, and made impulsive trades without any consideration for longevity or consistency.
  • Successful clients would comment about their decision making. “I stuck to my rules and the market obeyed”. “I stuck to my rules but unfortunately had to cut the trade…it was going nowhere and we had news coming..”. “You know…I broke my rules…fortunately the market let me off the hook and I was able to close at par”. “Today I was sloppy, I didn’t follow the plan and the market punished me. I deserved it!”.

Good traders are process-driven, and are concerned about their consistency and their longevity.

Perhaps it’s better to adopt their same vision, and forget about the money.

About the Author

Justin Paolini is a Forex trader and member of the team at  www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.