Trading rule number 2: reread rule number 1
While Trading rule number 1 is not to lose money, trading rule number 2 is to: reread rule number 1.
You may find this trading rule funny or uninteresting, yet it is at the heart of any trading system: you must adhere to the rules that have been set if you want to make money in the long term, and this is certainly one of the hardest 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 system of high probability, for its success rate to be consistent, you must apply the same rules continuously, it is by breaking these rules just once, by not respecting your money management, that your trading results can collapse.
There are numerous psychological explanations which explain why traders regularly break their own trading rules, each trader should have a personal analysis but we can draw up two fairly classic types of trader:
The casino trader or the pathological gambler
This is the type of trader that you most often meet, it is this type that has the least chance of surviving in the field of trading. He finds it impossible to follow the first rule, do not lose money, because he is essentially trading for the thrill. He is the prototype, classical casino player who is more concerned with the emotions and the dream than a return on his portfolio. His profits always seem inadequate to him, compared to his objectives.
He is a trader who is continually frustrated with his results and always wants more. If he succeeds in trading, he will take more and more risks, not to achieve his objectives but to increase his emotions, his tension. This personality always seeks out limits and constantly tries to stretch them. I knew a trader whose goal was to make 1 million euros, something he managed to achieve. Once he achieved this objective, he found that one million euros was not enough and he increased his goal to 2 million then five million euros. Always more … until his eventual downfall, until everything was lost and he had to start again.
The goal of the pathological gambler is not to win, but he is often driven to repeat things; he wins, he loses, he starts again. Subconsciously, he is looking for the fall in order to be reborn; it is a way to feel alive, and to fight the fear of death: these are players who are constantly repeating the same mistakes, because this repetition is reassuring and has the possibility of “renewal”, to rise again like a phoenix.
The blinkered or egotistic trader
This is a well-known class of trader who bitterly haunts trading forums. They are generally the most aggressive. These are traders, often with personalities filled with certainty, who can hardly develop. They assume, for example, that the market will collapse, and they believe this at all costs. Their choice is made; nothing can move them, even reality…
Therefore, they are not able to cut their losses because they are right; people are stupid not to see things as they do, the market is wrong. And they spam stock exchange forums, always finding fault with the same things, in the hope that they can carry out their aims though a simple act of will. If their script does not play out, they can even become verbally aggressive, those who don't share their opinion are ignorant. There is a form of "anorexia nervosa" among this type of trader, certainty replaces reflection and adaptation. A blinkered trader has no chance of lasting on the stock market because one of the most important characteristics of a financial market is that it is constantly changing and that you must accept the idea of always putting your trading methods into question in order to try to change with it. Uncertainty and change control the stock market, a blinkered trader filled with certainty will not survive for long in a changing world.
Since 2011 you have been able to see traders who persevere in taking bearish positions while stock markets increase in a straight line for over 18 months. 90% of these traders have disappeared, knocked out by a bullish market. These traders find it impossible to follow the first rule, they are not able to cut their losses, on the contrary they have a tendency to strengthen their position as if their conviction could influence the market in any way. A trader with certainty is a condemned trader, trading teaches you one thing: the market is always right.
In compiling this brief overview of the pathological gambling trader, who looks for sensations before anything else, and the blinkered trader, who doesn't accept reality because he is blinded by his ego, I would like to ask you to think about what drives you, what drives us, to not follow our own trading rules, our Money Management, even though we know very well that it is this discipline that enables us to be winning traders in the long-term. In my opinion the hardest thing for a trader to do is accept that he is wrong and to be aware of the gambler that is in all of us.