There is an aspect of trading that tends to go unnoticed among most traders, and it’s something that could be slowly destroying your trading account (in all honesty, it probably already is). As traders, we are dealing with numbers on a computer screen; digital representations of our cold, hard cash. As a consequence, we often forget about the impact of not actually touching, feeling, smelling or seeing the money that we win or lose on a trade. The impact of having no physical interaction with the money in your trading account as you win or lose on trades, is very real and very significant…
The primary issue with never touching, smelling or seeing the money you lose or win on any given trade, is that you become desensitized to the true, real-world significance of it all.
Let us do an experiment…which of the following two scenarios would make you angrier (among other emotions)?
SCENARIO 1: You are at the ATM machine and you just withdrew 5,000/- from your bank account for a nice dinner with your family when someone runs up on you unexpectedly, knocks you over and takes the 5,000/- from you and then runs off.
SCENARIO 2: You are sitting at your computer, in your own home, having a sip of beverage you love and your stop loss just got hit on the XYZ short trade you entered two days ago, also resulting in a 5,000/- loss.
For sure, anyone would have answered “scenario 1” would make them angrier than scenario 2. Yet, the same amount of money was lost in both situations, so why the different reactions?
The reason is simple. In scenario 1, the money is much more “real”, it was in your hands, and you touched it and maybe even smelled it; you had a physical connection with it. Whereas, in scenario 2, you simply saw a digital representation of your money decrease by 5,000/-, but you felt no actual physical loss of that money.
Some people might argue here with something like “I do feel the money when I lose or win on a trade sir, I don’t need to hold the money in my hands to feel the impact”. It’s easy to think this, but the truth of the matter is that one of the big reasons people tend to lose money in the market is because of the whole “out of sight, out of mind” aspect of it. When you lose money on a trade it has much less impact than losing the same amount of money to a thief at an ATM machine, and when you win money on a trade it also seems much less important to you than if you found a pile of actual cash while walking through the park….even if the amounts were all equal.
Every trader probably struggles with sticking to their trading strategy and being patient enough to wait for high-probability trade setups. Traders probably also struggle with keeping their risk per trade consistently below a certain maximum amount. A big reason why they struggle with those things is because they have no thing or person to be accountable to.
When a person goes to work every day, their boss is there. If they do something really wrong or stupid at work, they might get fired…they are accountable to someone. As a trader, one is only accountable to himself or herself, and for most of them that means they let things ‘slide’ a lot more frequently than they would if they had a “trading boss”. This sliding, means doing things like entering the market on a ‘whim’ when no real setup is present or doubling up risk because they want to ‘make back’ the money they just lost. There are no consequences except losing money, and money they won’t even be touching or seeing at that. So, we can see that trading is almost designed to numb a person down and make them feel desensitized to the real-world impact of the money they are making or losing.
Money management can be one of the most difficult aspects of trading for most traders. So much of managing your money correctly in the market revolves around feeling and understanding the FULL IMPACT of your wins and losses, and having something or someone to be accountable to is a great way to constantly remind yourself that you really ARE losing REAL money that you worked hard for, or that you are making real money that you can use to better your life with (so don’t gamble your profits!)
Money management ability is critical
As discussed above, having a “trading boss” can help give you something to be accountable to as you trade. After all, no one but you really knows your trading results, so having the physical presence of someone to answer to in your house will help you stay on track and remain disciplined. It’s easy to “forget” that you are getting off-track and trading without discipline when the losses are conveniently hidden away in the trading account history of your trading platform, which you have the option of simply never looking at if you choose not to. However, when you keep track of your trading wins and losses, you have a very real reminder and reflection of your ability to stay on track and trade with discipline, and if you break that discipline you have someone staring you in the face essentially PROVING to you that you don’t have the discipline to trade successfully.
Money management discipline can be hard to maintain when trading the market because everything is done on the computer and there is no real physical sense of making or losing money. Thus, traders tend to become “numb” to their wins and they end up abusing their trading profits as a result, and they become “numb” to their losses which makes the loss seem less significant than it would if someone took the money from their hands.
To counteract this “numbness” to the money you win or lose on your trades, it will help to use proper money management techniques to make the results of trading seem more “real”. This is a very effective “trick” or tool that traders can use to develop themselves into a disciplined trader, then eventually, once that discipline is turned into a habit, make the exercise even more effective by rewarding yourself at the end of each. Buy something or otherwise reward yourself for being disciplined and staying on track, eventually you will begin to enjoy the discipline and the routine you've developed. If you can consistently manage your money with discipline as you trade, you will have conquered the most difficult part of trading. Then, all you need to do is combine that discipline with an effective trading strategy, and you will be ready to start profiting in the market.