I actually got this question from my own younger brother as he is also learning how to trade for himself so thought I would answer this to the benefit to all since it is a common problem most people starting out have, and I personally experienced when I first started too.
Because we all do not like losing and we all hate making ‘mistakes’. Avoidance of loss and mistakes has been drilled into us from early childhood especially at school.
As early as I can remember, I always strived to get 100% in all my exams. Not that I was always successful at it but that was the goal. I had to make zero errors to achieve that goal so therefore mistakes was a no no and the less mistakes in exams allowed you to become top of the class and grade.
Our parents also drill it into us as we grew up. ‘No’ to this, ‘no’ to that…
Hence, we bring this mentality into adulthood and must do everything ‘right’ and never make a mistake, which we all know is impossible through life.
Some may even term themselves as a ‘perfectionist’, which I find hard to believe since perfection (besides nature itself) can never, really be achieved. I believe that everything can always be improved some way.
Even after two decades of trading and investing, I am still learning to get better because there is always a better way.
Therefore, no wonder we find it hard to pull the trigger when trading and investing.
So what is the easiest solution to all of this? This list is only the start.
- Accept that losses is part of the trading and investing game
The best loser is the long-term winner – Phantom of the Pits
The above quote sums it up by a trading legend.
- Accept that mistakes is part of the trading and investing game
Just like learning everything else, you will make mistakes, especially when you are starting out and learning a completely new skill set.
- Accept that even the best on the planet make losses and mistakes and you are therefore no different to them and are not better than them
Even Warren Buffett openly admits making mistakes throughout his career and he is considered the ‘Oracle’.
I recently asked a very prominent fund manager and asked his about his team of analysts’ success rate. Answer? 55%. So even the pros that analyse companies everyday full time are only slightly better than even odds. So why do we need and think we can get 100%?
- Plan the trades and trade the plan
Even the old saying applies to trading; If you fail to plan, you plan to fail.
- Position size accordingly so no one trade will either make you or break you
This is perhaps the biggest one of them all. Most people want the big win, and they believe big wins means betting the farm. They see the upside but neglect the downside. Leverage is also a contributing factor since it allows anyone with a modest account size to trade as if they are a pro. However, what they do not realise is that most pros, actually abhor leverage and only use it sparingly because they are aware of the downside of leverage.
If one can simply place small trades relative to their account size ie less than 0.5% risk on average of their entire account size, committing to a trade will become so much easier since risk of a large loss no longer applies and thus doesn’t paralyse your decision making process.
- Accept that trading and investing is a get rich slowly game and there is no rush to get there quickly if you want to succeed long term
We all live in a fast and immediate gratification world. We all want this ‘now’. Trading and investing is not like that. You can get lucky and hit a few large wins right off the bat. However, those stories are rare and should not be believed from friends or colleagues. People love sharing the good news due to ego. What they do not reveal is the losses they also endured to get that big win or they do not reveal the small size of the bet they put on making you think they were a genius to get it so right.
- Create trading systems that give you a ‘positive edge’ meaning you know that over a large number of trade and investment decisions, you are either more right than wrong or your profits are much larger than your losses.
This is also another big one. Most see trades as individual trades. Instead, you will dramatically improve your result if you saw the one trade as just that, one trade in a series of hundreds or thousands you will put on through your lifetime and then all of a sudden, that one trade pales in insignificance.
Transform your thinking into a portfolio approach from an individual trade approach.
- Know your numbers over a large trading sample size. Know that, and you will never be afraid to pull the trigger when the time comes.
This is an extension of the last point. If you have placed a large number of trades on (greater than 100), you now have an approximate idea of how well you can do going forward and if you are happy with this, placing trades is nothing but a process of achieving your long-term numbers.
- Accept that you are human, so minimising mistakes, learning from them and not avoiding them is the only path to trading success.
Look, we are all human. I have personally made more mistakes I would like to admit and remember. What I do though is try to not repeat these mistakes and learn from them. If you learn from mistakes, they are not mistakes but become valuable lessons to take your trading to another level of proficiency.
- Lastly practice practice practice. Paper fake trading is never the same thing as putting real money on the line. So begin practicing on a small scale until you are comfortable and then gradually scale up. Give yourself time. Remember, Rome was never built in a day. Trading success is no different.
I have seen many courses teach paper trading and show ‘model’ portfolios, which have been massaged to look good theoretically. Real life trading does not work that way.
Just imagine yourself putting on a paper or fake trade of say your whole months’ salary.
Now, try doing it real time in the real markets. With the real risk, knowing there is a big probability you will lose your entire months salary. Now how do you feel?
I do not think you feel the same as the paper trade. All sorts of emotional issues come up like;
I worked so hard to get that salary
I put in so many hours to get that month pay
How do I pay my rent if it’s lost
How do I explain to my partner I just lost my months’ pay?
See what I mean?
Therefore, start small, very small. If you think you can risk $500, halve it and even halve it again to $125. If it’s still too much, halve it further until there is a level you are comfortable at. This makes ‘pulling’ the trigger so much easier in the short term and over a large series of decision-making actions, your long-term ability to pull the trigger becomes second nature.
I truly hope this post helps you in your quest to become the trader and investor you want to be.
It has been my experience and I am blessed to share this with you and hopefully make a difference in your life.
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