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3 Deadly Trading Sins (Part Two)

By 11th October 2019 News No Comments

Trading more money that you can afford to lose

If you are new to trading, you are likely to be full of optimism, which in trading, as I say in most of my articles, is a bad attitude.

You’ll think that the strategy that you have tested or traded on a demo account successfully for months will make you rich soon. In trading, you can become rich by trading your own money but only in the long term.

In the end, you’ll put too much money into your trading activity.

There are many things that could go wrong at the beginning, like wrong orders, lack of knowledge about market rules, or simply not being good at predicting the market.

The money put in the first account should be seen as an investment in your education. It allows you to put into practice what you have learned. Consequently, the amount of money in it should be the same as the price of a trading course you can afford.

In the future, when you have been profitable for at least one year, you can slowly trade more money.

I have never in my life seen any trader who does not pay the price for their overconfidence.

For people who have not yet traded, what I have just said sounds obvious, unnecessary or even boring, like a moral prescription.

Surprisingly, a lot of people become risk-takers from the moment they open their first account.

I have seen people asking for a mortgage because the money they really needed was gone into a trading account.

Last year, someone I know lost the money he needed to buy a new car for his family.

Over the last twenty years, I have heard many sad stories of people who have encountered financial trouble as a result of ignoring the risks. I don’t want to make you cry, so I’ll stop here.

Currently, there are many people who think that negative emotions should just be shutdown and that they should be blamed for everything bad that happens in our lives.

At the same time, positive emotions, like happiness, are always seen as unconditionally good, require no control, and never cause damage to our lives.

In both Western or Eastern philosophy, sadness was a step through which a human could achieve wisdom or an alarm that reminded us that we are doing something wrong and we need to make some changes in our life.

Sadness or anxiety, when under control, are warnings that help us to avoid risks.

If I was investing too much money on a single strategy, for example, I would not be able to sleep. I would eventually realize that I was doing something stupid.

In my business, an excessively good mood is always very dangerous because it leads to overestimating the possibility of succeeding.

The tearful stories I have mentioned above are likely to be a direct consequence of a moment of excessively high mood that makes people blind to the risks involved.

It is really impressive to see how unconscious a human can become due to a lack of control over their emotions.

Seasoned traders tend to become over confident after an extraordinarily successful series of good trades and increase the size of their account.

I have known people who have been successful for many years, retired from their previous “normal” jobs and who have gone bust because the satisfaction they had after a very good year made them ignore the risks.

By making a decision when in a very good mood, a plan B is not even contemplated.

Having a normal and balanced mood is an essential trading tool that is always ignored.

At this very moment in my office, there is a company downstairs advertising some sort of “corporate mental health day”. I just quickly read the flyer. What they do is convince people that “bad emotions” should be suppressed because they are “toxic”. This is what leads to a general inability to manage any sort of risk that comes up at work.

If someone does not run into many risks in their daily life, this approach won’t have many side effects. However, it would be very dangerous for society if a surgeon or a portfolio manager suppressed their fear all the time because then they wouldn’t be aware of the danger.

(To be continued)

A way to avoid this and other sins is to have a look at the course we offer on algorithmic trading and on options.

 

Warning: There is a risk of loss in trading. It is the nature of commodity and securities trading that where there is the opportunity for profit, there is also the risk of loss. Commodity trading involves a certain degree of risk, and may not be suitable for all investors. Derivative transactions, including futures and forex, are complex and carry the risk of substantial losses. Past performance is not necessarily indicative of future results. Please read additional risk matters on our web site www.londontradinginstitute.com
It is important you understand all the risks involved with trading, and you should only trade with risk capital. This communication is intended for the sole use of the intended recipient and is for informational purposes only. It is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument.