We live in a society that is completely drenched in adrenaline and dopamine — and the markets are no different. We’ve all seen people that must be market participants at all times. They have to be involved because they view the screens like a casino floor, full of flashy lights, sirens, and bells.
These traders feel as if they’re always missing out on an opportunity, so they spend all their time scouring news, research reports, message boards, Facebook groups, and Tweets looking for something that will help them get one step closer to success. And, unfortunately for you, Wall Street is full of expensive services offered by people who ultimately have no true idea how to help you succeed.
You’ll see pictures of these characters standing in front of sports cars, expensive houses, and private jets, waving around wads of cash and screenshotted P&L’s with very limited information on how the money was truly achieved. And, sadly enough, many people will trust these so-called ‘experts.’ But statements can be Photoshopped, and you can rent a Ferrari by the hour.
You are getting a subliminal message that you can live your dream of being a financially independent trader. This is a type of addiction to excitement, mediated in part by the neurochemical called dopamine. The anticipation of the reward becomes much more powerful than the reward can ever be. It’s easy to start thinking “I have to get in NOW because the price is running away from me. I know I’m breaking my rules, but if I just chase it this one time, it’s okay because I know I can make a killing on this one. Why should I wait for the price to come to me? Maybe it won’t, and then I will have missed it all. There’s no fun in missing out.”
This sounds all well and good, and the dopamine brain pathways, which are activated by potential for reward, kick into high gear. The dopamine neurons are firing on all cylinders, and you’ll feel pure exhilaration. It feels wonderful… until it doesn’t.
Suddenly, the position starts to turn against you. You chased. It came back in. And now you’re looking at an ugly, disheartening, losing trade. And now you regret breaking the rules. You feel miserable, but hold on… it’s about to get a lot worse.
Right now, your odds of making a financially devastating decision are through the roof. The dopamine reward pathways of the brain shut down, and your brain’s neurological connections that mediate fear activate! As your emotional roller coaster starts nearing the ground, your brain starts releasing unique chemical concoctions into your body, flooding your bloodstream.
And just like that, your ability to make a logically based decision deteriorates rapidly. If you’re lucky, you’ll escape with a few cuts and bruises, and you’ll live to fight another day. You’ll recognize what you did wrong and simply walk away to recharge. However, you could also suffer from confusion, frustration, blaming, self-sabotage, and systemic toxicity. This will leave you feeling empty, confused, disillusioned, and just plain worn out. And if things get really out of control, you will average down, perhaps multiple times, because you’ll be convinced things will magically work out.
You could end up suffering a significant or even crippling blow to your account. And worst of all, your mind will be full of psychologically toxic thoughts. I’m sure you’ve been told at one time or another that you have to preserve your financial capital. It’s pretty obvious why that’s important. Without financial capital, you cannot trade. You can’t even open an account.
However, there is a second form of capital that’s even more important: your psychological capital. Money buys stuff and can solve some of your problems (at least your money problems). And if you do not have money, you are out of the game.
However, you must internalize the mentality that money is a byproduct of maximizing your psychological capital. Your psychological capital is the essence of the person you are — as a trader, and as a human being.
My number one rule: #
My number one rule of trading is to preserve your psychological capital. This means making yourself emotionally, mentally, physically, and spiritually strong and healthy.
Stand apart from yourself, and look at yourself with a critical eye — almost as if you were advising someone else how to trade or how to live. When you imagine yourself giving advice to someone else, you are minimizing emotional charge. Since emotions are often the greatest enemy of the trader, you then put yourself in a neutral position.
You allow the newer, thinking portions of your brain to put the older, primitive, dopamine-driven brain into perspective. This is the most difficult journey you have as a trader. Your psychological capital is all you really have. You can go out and earn more money, you can turn your money over to someone else to manage, or you can stop trading and invest in some new activity. You have infinite choices about what to do with your money. But you have only one body, one mind, and one spirit.
When you are stressed, sleep-deprived, contaminated with worrisome thoughts, or in a toxic state because of bad trades, junk food, or dysfunctional relationships, you have nothing but despair, self-loathing, anger, or depression. You are in a state of mental and physical disease. And you should not be trading. In the end, if you lose your health, you lose everything. Money might be able to assuage this misery, but you’re just putting a band aid on a large, gaping wound. Eventually, the wound breaks open, becomes infected, and just gets worse unless you deal with the source of it.
As always, you have the power to be the best you can be in every aspect of life. It’s really quite awesome when you think about it. You are the problem, and you are the solution!
If you want to get a true picture of who you really are, what you are capable of doing and becoming as a trader and a human being, then stop looking outside of yourself. Go within, as the answers are all there. I promise you that it will be the most amazing journey of your life.
I once read about a survey listing the most stressful jobs in the world. Sitting at number three behind specialists in charge of nuclear disarmament and being an elite soldier in the U.S. Special Forces is daytrading. So trading is stressful.
Stress can often lead us to do things we know we shouldn’t be doing. Stress triggers defensive behaviors that cause traders to avoid high reward situations that contain moderate risk. Instead, the trader will often opt for the safe haven route, where situations are low risk — but also low reward.
Unfortunately, when you trade to avoid all risk, you are literally shooting yourself in the foot.
The “trading not to lose” mentality appeals mostly to those traders who feel they can make money in this market while completely eliminating the risk aspect. We all know that’s just not realistic. Yes, you can curb your risk, but there’s no way a trader can completely eliminate it. And sometimes, when you take a moderate amount of risk, you can actually get outsized rewards.