It’s on the bottom of every piece of commodity trading literature, every commodity investment advertisement, as demanded by the National Futures Association. Warning: Only risk capital should be used for futures and options speculation. CFTC rule 4.41, the official name of another
set of warnings to the investor, might as well be Area 51when it comes to investors heading the warning!
Over my CTA/trading career, I’ve talked to many traders just beginning their quest for riches and too many of them approach the market with “money they’ve saved up” for the purpose of speculation. That may be all well and good, but before you start on your journey of pain and joy, get one thing straight. (See my recent article on new traders.)
You’re going to get emotional.
Just HOW emotional will be largely a function of whether your risk capital is “comfortably losable,” when you are faced with a step back on your road to profit. The more mental and emotional investment you have in not wanting to lose your stake, the more you are likely to lose it.
OK. You’ve got a trading system you like. You’ve back-tested it. You like it. You do some “worst case” math. “Let’s see, with the stake I’m going in with, if I keep my losses to a maximum of X dollars, then to lose my stake, I’d have to have 20 losers in a row. Never happen.” Seasoned traders are laughing to themselves reading this because they know that if you have to do this kind of math, then your chances of surviving and prospering are slim to none.
It’s like the guy who counts his chips at the blackjack table. Those that are too concerned about every chip are usually playing scared. And you know what happens to scared money. Yes, it flows into the pockets of the confident. And that is the point of this text exercise.
If you don’t REALLY have an “if it’s gone it’s gone, and it won’t affect my lifestyle in the least” attitude, you are not creating the best chance to win. I’m not saying that you should take a flippant attitude toward losing or winning. I’m saying that the more losing your money has emotional meaning the less chance you have of succeeding.
Futures and options trading should ideally be part of a mix of diversified investments.
Who am I kidding?!
Most of the newbie traders I come across have their bills covered and are looking for a way to break out of the financial doldrums. Enter Ken Roberts, and all the gurus telling you your dream is possible for a stake of $3,000. And maybe it is for the Few, the Proud and the Lucky. But not for most. Why? Scared money.
To win, your attention should be focused on the process of trading, not on each win and loss. If you don’t treat trading like a business, and make sure it’s well funded, you’ll wind up the way of the Edsel.
In the end, it’s all about attitude and you mental strength of conviction to follow your tested trading plan. If you’re under-capitalized, your conviction will waiver as fear creeps in. You’ll hesitate when your system gives you the green light and you’ll take your profit too early. Your light will dim and in the end, after blaming market conditions, your light will go out.
Whether you’re going to “fake it till you make it”, or you have adequate capital to begin with, you better have your emotional wits about you.
Norman Hallett, CEO and Head Trainer of The Disciplined Trader Intensive Program has written a terrific FREE E-book "Taming Risk" which gives you clear risk and money management guidelines to improve your trading plan.