What Doesn't Bankrupt Us Makes Us Stronger

The subject of this blog post is simple enough: don’t blow up your account while you’re learning how to trade. 

Seems obvious, right? But it happens more often than you might think. Even experienced traders can fall prey to the powerful temptation of quick riches in the stock market.

But unless you actually choose to follow the common trading mantra of “Live to trade another day” it’s going to be extremely difficult – if not impossible – to become consistently profitable on a long-term basis. This is because putting all of your money at risk in one trade or strategy is a sure way to lose it all. 

And huge trading losses, especially the ones that clean out your account, not only set you back financially in a big way but can also force you out of trading forever and lead to significant distress in your personal life. 

As you get more acquainted with the world of trading you’ll hear a lot about how fear and greed are the main psychological drivers in trading, and this is certainly true. If you let either emotion influence your trading decisions it can wreak havoc in your account.

For instance, fear holds us back from taking positions at the right time, like when there’s “blood in the streets”, and instead talks us into getting in when the stock’s advance is near its climax. This is called FOMO, or fear of missing out.

Conversely, fear keeps us on the sidelines when the market rallies 50% because of our obsession with the possibility that the market will suddenly crash at any moment. This has been one of the more common bummers for traders and investors over the past decade or so.

But, most importantly, fear makes us sell out of our positions at the worst possible time. This is what can cause a big market selloff: panic selling. When you think the stock you’re in is about to go to zero or the market is about to crash is when the terror sets in. If more and more market participants start to believe the same thing then that’s when fear builds on itself and the selling really intensifies.

Greed, on the other hand, makes us stay in our positions way too long thinking we’ll somehow know where the top is, which many times leads to us overstaying our welcome and giving back what we worked so hard to make.

Greed leads to the kind of stubbornness that makes us continue to add to our positions on the way down thinking we must be right and the market must be wrong. Bad idea.

And, of course, greed tells us to load up on a company like Enron when we start dreaming about how much we’re going to make once it turns around and goes to the moon. This is where greed is especially dangerous because it makes us put way too much risk into one trade or strategy thinking it’s a sure thing. 

Greed tempts us to give in to those fantasies about making millions of dollars overnight in the stock market. I guarantee that more people have lost all of their money giving in to these fantasies than have actually made any money out of them.

We’re going to give in to these emotions every now and then because we’re human, but if we want to be consistently profitable in the markets we have to learn how to keep our perspective so that we can temper them. We have to learn how to not let them make our trading decisions for us.

When you allow emotions to guide your actions instead of adopting a more objective, analytical approach, you’re more willing to do highly risky things with your money instead of proceeding in a disciplined, measured way. The markets demand the latter or they demand that you exit the premises.

I promise you that it’s going to be an exercise in futility trying to make lots of money chasing around the promise of big, sudden winners. Even the ones with the best fundamentals and technicals in the world may chop around in a narrow price range for years. But, of course, home runs are so much more exciting than base hits, and our quest for the next adrenaline rush makes us want to believe it’s right around the corner.

I’ve heard of and even met traders who’ve blown up their accounts and lost spouses and partners as a result. This is why I said this kind of thing can lead to significant distress in your personal life. It can lead to depression and anxiety and at the very least can be a huge hit to your confidence as a trader. 

I know traders who’ve quit after doing this, and some of them actually blew up their accounts multiple times before they finally quit. There are even instances of highly experienced traders, some with reputations as experts in the industry and a loyal following of aspiring traders to boot, who blew up their accounts. This is a prime example of how powerful greed can be.

Something those experienced traders should have known very well is that the only way you can stay in the game is to always make risk your first and most important consideration when placing a trade. Always make your first calculation how much you’re willing to lose, not how much you want to make. 

Before making any trade, force yourself to think about what it would actually mean if you lost that money. What would your bank account and personal net worth look like if it happened? It’s one thing to say you’re comfortable losing a specific amount of money but it can be another thing entirely to actually go through the experience of losing it.

If your bank account and personal net worth would be fine – in other words, if the capital can easily be categorized as risk capital and not as capital needed for everyday expenses or for paying off debt – then you’re much closer to feeling okay with putting that amount at risk.

If you do this enough you can eventually establish a process that becomes second nature to you and gives you a high degree of comfort in your trading because you’ll always know you’re not risking more than you’re willing or able to risk. 

And then, as you make a little money here and there in the markets, you may very well gain the confidence to earmark those steady gains for opportunities that demand a little more risk. These prime setups always show up; you just have to be patient and ready to pounce on them.

It’s definitely possible to catch a ride on a rocket ship now and then without using up all of your rocket fuel on the ones that blow up at takeoff or never even get off the ground. I’ve done it many times. Learning how to find these superior risk-to-reward opportunities in the markets and taking a little more risk when the right opportunities present themselves is the better way to hit big winners and, at the same time, to stay in the game.

In order to do this your focus has to shift from the excitement of scoring quick riches to finding opportunistic ways of compounding your money over time while always keeping your risk within acceptable parameters. But it’s extremely unlikely you’ll get to this point if you put all or most of your money on the line in order to make a lot of money all at once. 

I know it sounds very unexciting. You might as well watch paint dry, right? If the markets don’t provide excitement and instant riches why even trade them, right? But you can make lots of money in the markets if you’re willing to put in the work and to develop the right mindset. You just have to make that choice and hold yourself to it.

You have to be willing to chop wood, as they say. You have to be steady and patient. And you have to be ready for the bigger opportunities that come along and be willing to take advantage of them. Put all of this together and it’s how you make more money than you lose over time, which is consistently profitable trading. That’s the game.

Remember what Benjamin Franklin said: “Money makes money. And the money that money makes, makes money.”

The key is to not be focused on making all of that money at once.