Trading rule number 2, reread rule number 1
While Trading rule number 1 is not to lose money, Trading rule number 2 is: reread rule number 1.
This trading rule may seem funny or uninteresting to you, yet it is at the heart of any trading system: rules that have been fixed must be respected if you want to make money sustainably and certainly that is one of the most difficult things for a trader to do.
I see it every day on my stock market forum; losing traders are always those who do not follow their own rules. Trading is a high probability system. For its success rate to be significant, the same rules must be continually applied. It is by violating these rules once, by not respecting your money management that your stock market results can crumble down.
There are many psychological explanations that account for why the trader regularly violates his own trading rules. Each trader should do his own personal analysis, but we can come up with two fairly standard types of traders:
The casino trader or the pathological gambler
He is the trader we most commonly meet; he is the one with the weakest chances of survival in the trading environment. He will find it impossible to comply with the rule number one – not to lose money – because he trades mainly for sensation. He is the classical prototype of the casino player who is looking for emotion and dreams much more than a return on his portfolio. His earnings will always seem inadequate compared to his objectives.
He is a trader who is continually frustrated with his results and is always looking for more. If his trading succeeds, he will continuously take risks, not to achieve his objectives but to increase his emotions, his blood pressure … He is someone looking for limits and constantly tries to push them. I knew a trader whose objective was to win 1 million euros, something he managed to achieve. Once he achieved this objective, he found out that one million euros was not enough and he rose to 2 million then five million euros. Always more … until the final fall, until he lost everything to start all over again.
The goal of the pathological gambler is not to win, but often he rather has the urge to repeat things; he wins, he loses everything again, and starts all over … Unconsciously, what is being sought is the fall in order to be reborn; it is a way to feel alive, and to fight against the fear of death: these are players who are constantly repeating the same mistakes, because this repetition is reassuring and gives them the opportunity to “reinvent”, to live life again as a phoenix.
A narrow-minded trader or one with a big ego
This is a category of well-known traders who haunt stock forums with rancour, and they are generally the most aggressive. These are traders, often with personalities full of certainties, who can scarcely move forward. They assume as a premise that the market will collapse, for example, and they believe this at all costs. Their choice has been made; nothing can move them, , even reality…
They will therefore not be able to cut their losses because they are right; people are stupid not to see things as they are, the market is wrong. And they spam stock forums to forever rant the same thing, in the hope that they are achieving their aims simply through their will. If their scenario does not happen, they may even become verbally aggressive. Those who do not share their views are ignorant … This type of traders have a form of “mental anorexia”, with convictions replacing reflection and adaptation. A narrow-minded trader has no chance of lasting in the stock market as one of the most important features of financial markets is that they are constantly changing and you must accept the idea of always challenging your manner of trading, your methods … to try to move with it. Uncertainty and change dominate the stock market; a trader who is full of convictions and narrow-minded will not survive for long in a changing world.
Since 2011 we could see traders persisting in taking bearish positions while stock markets have been going up in a straight line for more than 18 months. 90% of these traders have disappeared, annihilated by a bull market. These traders cannot follow rule number one, they will not be able to cut a loss, they will instead tend to reinforce their position as if their conviction could in any way affect the market. A trader with convictions is a condemned trader; trading teaches one thing: the market is always right.
By quickly giving a description of the pathological gambler trader, who primarily looks for sensations, and the narrow-minded trader who will not yield to the principle of reality because he is blinded by his ego, I would urge you to reflect on the reasons which push you – which push us – into ignoring our own trading rules and our Money Management, whereas we know very well that this is the discipline which makes us winning traders in the long-term … In my opinion the hardest thing for a trader to do is to accept that he is wrong and to listen to the player in him.
List of my 10 personal trading rules:
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