Read this before you quit…

Regardless of whether your aim is to trade full-time for a living, or just gain a supplementary income stream, it’s important to understand how risk, and monetary loss associated with that risk, can potentially wreak havoc with even the most carefully constructed trading plan. Trading is like no other profession on Earth. Outcomes that might be expected to occur by following traditional business protocols cannot similarly be expected when trading financial markets. Simply put, just because you follow your trading rules doesn’t necessarily mean you’ll be successful (although I can almost guarantee you WON’T be successful if you DON’T follow your rules!). If you talk with a seasoned trader, they are likely to advise you approach each trading day with the expectancy you’re going to lose! The reasoning behind this advice is that it will lower your expectations, and prevent you from over-extending your risk.

"Winners never quit and quitters never win."

Vince Lombardi

Paradoxically, the distinguishing characteristic of most top traders – one which separates them from the long list of ‘wannabes’ and ‘has beens’ – is seemingly at odds with this anticipation of negative results. Successful traders possess an almost impenetrable buffer of positivity. An invincible self-belief that allows them to continue trading in the face of adversity – in this case, a string of losing trades.

Trading today’s markets isn’t the same as it was during the low volatility, upwardly trending era of the late 20th century, where even the most amateur of investors could expect to strike gold by using a simple buy-and-hold strategy. Conditions in all contemporary markets now require skill and persistence, and that means you must be prepared to take a risk if you want to earn a living through trading. Taking a risk also requires you accept the potential for loss and even if you exercise sensible risk control (as you absolutely must), you nevertheless remain at the mercy of market forces. You may still find yourself facing loser after debilitating loser as you watch your account balance evaporate.

As much as you may attempt to objectify these results by substituting monetary loss with a percentage value, it’s almost impossible to avoid feeling at least some pain. And it’s during such losing periods that traders find it most difficult to maintain confidence and stay in the game, let alone stick with a plan. The urge to give up can be overwhelming. Novice traders – even those that have taken time to battle-test their strategies – often approach the market as if it was a syphon attached directly to a bank vault. Sooner or later though, they come face to face with the inevitable reality that markets are unforgiving. Conditions constantly change, and just because a strategy worked last week doesn’t necessarily mean that it will work this week. Losses instigate an emotional death spiral, usually following a common, self-sabotaging sequence; unbounded optimism and enthusiasm, followed by a reality check, followed by anxiety, followed by depression, and finally, resignation.

To overcome this destructive behavioural pattern, it’s necessary to gain an understanding of how our brains individually deal with emotional stress. Clinical psychologists argue that most people will either give up or persist on a project, depending on their expectations of reward or punishment. If you believe, for instance, that no matter how much effort you expend on a project, the end result is going to be fruitless, then it’s very probable you’ll decide to quit. Conversely, if you believe that the project is destined for success, you’ll not only persist with it, but you’ll also be more likely to work even harder in anticipation of greater reward, despite setbacks that may occur from time to time.

"The goal of a successful trader is to make the best trades. Money is secondary."

Alexander Elder

As I mentioned earlier, trading isn’t an activity where success is guaranteed. With trading, losses are the rule rather than the exception. No trading strategy is, or ever will be, perfect, and acceptance of this simple fact will go a long way to bullet-proofing yourself against losing trades and losing periods. It’s more realistic to approach trading with the goal of developing gradual consistency, rather than hitting big winners. Recognise that the most difficult part of trading is overcoming the urge to get even with the market. And stop trying to discover the holy grail of trading systems, because (trust me on this) there isn’t one. Concentrate instead on honing your trading skills, and reduce your reward expectations. If you don’t expect too much when you first start trading, you’re unlikely to be disheartened to the point of quitting when your trades fail.

We know for a fact that there are many traders around the world who have developed their trading skills to a degree sufficient enough to realise fabulous profitability and success. It stands to reason that if you receive quality education and training, and devote enough time and effort to gain trading fluency, only your mind can prevent you from achieving similar profitability. So the next time you’re about to throw in the towel, take a moment to think about your perceptions and expectations of life and the markets. Don’t be in a hurry to be a zillionaire. Remember, it usually takes years to become an overnight success.

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