Monday, February 02, 2015

The $10,000 question: Why traders are hypocrites about trading goals and blow up their accounts

Most traders blow up their initial trading stake.  Destroying that first trading account is a right of passage that every successful trader goes through, but few admit to doing.  I don't mind that it happened to me.  I embrace it, I wear it on my sleeve.  In fact, when I was starting out as a brash young punk thinking I could mint money, I blew up two accounts.  Trust me when I tell you that demolishing two accounts has a way of sobering you up real quick.  I decided that I had to figure out what I was doing wrong.

This is when the light bulb went on for me.  I had my aha moment after I actually sat down to review my trades (as suggested in a $60 trading book that offered little else, but was still worth the money for that one piece of advice).  What I discovered was that I was a good stock picker.  I was hitting on 70 percent of my trades, but there was always that one trade that would kill me.  I had no concept of position size yet, or risk management, but on this day I started a journey that lead me to the holy grail of trading. 

Today I talk to tons of traders, and inevitably we talk about trading goals.  These days there is more information out there and most beginning traders have some idea of position sizing, so the goal always starts out sober.  It goes something like this:

Just like you Paul, I'll start with a small 5-10K stake, and consistently build it up to $100,000 in a few years.  I will keep position size small and only risk 1 percent per trade.  As it gets bigger I'll get even more conservative.  

It all sounds so good.  The problem is, that is not what we really want.  What we really want is to hit the lotto and get lucky with one or two stocks that change our lives.  We tell ourselves we will do it the "right way", but really we just want to get there as fast as possible.   

That's why just about every trader that says they will do it the right way ends up doing every thing wrong.  They make bigger bets than their account can handle.  In the beginning they might even get lucky, but greed takes over and they get even bigger.  Whereas they were supposed to start trading more conservatively, they make even bigger bets.  Eventually one of those big bets fails.  Then they make another one that fails.  Now, instead of sobering up and building slowly, they try to win those losses back.  That is the beginning of the end.  

This scenario is all too commonplace.  I know because I have had conversations similar to this one more times than I can remember:

Stressed Trader: Paul, I screwed up big time and need your advice.

Paul: You did not just blow up your trading account again, did you?  

ST:  No Paul, I didn't, but it's now half the size, so I'm going to start trading bigger.  

P: Oh, so you are asking me the fastest way to blow up your account, eh?   

ST:  Quit messing with me Paul, I've only got $5,000 left to trade and I need to make back my money fast.

P: Do you remember what you told me when you started with 10K?

ST:  Yes, but I need to make it back and then I'll go back to trading the "right way".

P: I can't help you son, you are going to blow up your account, and you will learn from it.  Come back to me when you have another stake.

Now guys and gals, if you are ever caught in this situation and feel the urge to get bigger:


I feel this kid's pain.  I have been there.  I know what it's like, but I also know I never want to feel like that again.  The average retail investor starts with around $10,000, and the prevailing wisdom is that 95 percent of traders fail.  Why do they fail?

It's because they are lying to themselves.  They don't want to incrementally grow their account.  They want it all now.  Be honest with yourself and ADMIT IT!  

Now once you admit it, sober up and fix your brain.  You know you have a better chance getting hot at a blackjack table in Vegas than getting lucky trading.  To succeed at trading, you know luck is not an option.  You must fix your mental trading game.

I know what's coming.  All right Mr. Market Speculator, that all sounds good, but how do I do that?  

I'll admit it take more than what I can write in one blogpost.  It takes hours of dedicated training.  However, you can start by:

1.  Always having a game plan for every trade

2.  Have automated rules in place for position sizing

3.  Never risking more than 1 percent on any single trade

4.  When you feel the urge (and it will hit you from time to time), dedicate yourself to a battle of mental warfare with yourself.  The evolved, intelligent, emotionally sound you needs to beat the crap out of the greedy neanderthal dreaming of a big payday. 

I know this sounds like a bit much, "battling yourself with a war in your head".  Trust me, I've read all the self help NONSENSE.  I do not want you to become a self help junkie.  That just becomes another headache in and of itself.  Nor do I want you to create a ton of complicated rules.  Just get in your head and beat the greed out.  It's that simple.

Once you have won a few battles, it gets easier to fight your true nature.  A feedback loop will form a HABIT and at some point you will no longer be a hypocrite.  You actually will want to build it the right way and the thought of taking on too much risk will make you sick.  

Finally, once you start analyzing your trades with a focus on risk and position size instead of stock picking, that when you know you have achieved true TRADING ZEN.

If you would like to learn more about how I trade, receive my nightly focus list with market analysis,setups and trade alerts, sign up for a 14 day free trial at  

If you like this article, follow me on twitter

No comments: