Let’s Talk About Money!

At the recent Smart Traders’ Online Bootcamp, organised by Round The Clock Traders, I gave a talk about ‘How To Build Your House of Trading’ and during the subsequent Q&A the topic of Money came up.  The usual questions of ‘How much money do I need to start trading?’ and ‘How much money in percentage terms of my trading capital can I make?’ etc, came up. These are fair questions to ask, but in broader terms, Money can have a funny effect on us and our Trading Mindset.

As you develop as a trader, you have to start working on your trading psychology or mindset and dealing with pre-programmed beliefs and habits can be a challenge.  Firstly, you need  to actually identify or recognise them and then to address them in a way that you can then move on, in your progression to being a better trader and person.  The reality is that Learning To Trade is also a Personal Development journey too.

One of our pre-programmed issues we may have to deal with is our attitude to and beliefs about ‘Money’.  As children we have probably been affected in some way by Money, whether it was a lack of it, causing deprivation, parental stress and hardship, or enough to be comfortable and not noticing it much and even maybe too much, resulting in potential personality and emotional issues.  But it is probably the lack of it and the resultant want of it that is the main issue.  Does the saying ‘Money doesn’t grow on trees!’ sound familiar?  Or ‘Money is a dirty word!’ Just do an internet search for ‘Money Idioms’ and you will see what I mean.  Often Money has been given a negative connotation.  If you really think about it Money itself is actually neutral, how it is viewed is dependent upon how we feel about it.

Desperation to make money often has an adverse effect on our trading mindset, causing us to make poor trading decisions and often resulting in losing rather than making Money.  To trade effectively, we need to be in a settled state of mind in order to be able to wait until the market brings a decent trade to us, rather than forcing the market to give us money, which inevitably fails.

One of the key things we always remind prospective clients is that trading and investing Money is Risk Capital, which should be in addition to the Money required to meet one’s regular overheads/outgoings and is also in addition to your savings.  This means that should you be unfortunate enough to lose that Risk Capital for whatever reason, it will not impact upon your current standard of living or that of your family, if applicable.  Risk Capital is just that, it is at risk when trading or investing.  There is no certainty in the financial markets and we teach that you should always expect the unexpected and the way to deal with that is to always use robust risk and money management.  At the end of the day why risk what you have and need for what you don’t have and don’t need?

For some people, there is never enough money and probably because of social comparison, the goal posts just keep moving.  As a trader you have to be content to just take a small chunk out of market moves and bank it. After all a trader’s job is to monetise trade setups.  Hanging on too long to try and make even more money, often can work against you, with a winning trade ultimately becoming a losing trade, particularly in volatile markets.

Albert Einstein reportedly said “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it”.

Trading makes good use of compounding.  The more you make the larger the position size you can use whilst still adhering to your risk management rules.  Compounding also applies to your savings and pensions etc.  Although interest rates are currently at all time lows, many governments are borrowing heavily in order to deal with the COVID crisis.  To diminish debt piles, historically, governments have encouraged inflation.  If they do this again then Interest Rates will rise in order to keep inflation under control and so a savings mindset will help you to benefit in the longer term.  I know times are hard for many at the moment but if you can, pay off as much debt now then you will be well positioned for likely rising interest rates in the future.

We also ask our clients ‘what is their ‘Why’?  What is their reason for wanting to trade?  Most answer ‘to make money’ but we then push them to answer ‘why do they want to make money? And keep asking ‘Why’ until they can get to the root of their desire to trade.  Knowing this is critical because it is the prime motivator and also helps when things get tough trading, as inevitably they will at some point, and normally sooner rather than later!

Now let’s talk about Wealth.  How much do you need to be Wealthy?  You can be extremely wealthy but not have the time to enjoy it, so what is the point?  True wealth, I would suggest, is the freedom to be able to say every morning that you can do anything that you want today.  Yes you need money to be able to do that, but, you just need enough to be financially unbreakable and not beholden to others for that position.  A lot of wealth is hidden wealth, it’s under the radar, not flashed all over social media, not in competition with others.  There is also a difference between becoming  wealthy and staying wealthy.  The latter requires a certain maturity around money.

Thus a mature attitude towards money will help your trading go from strength to strength.  Successful trading is not all about the money, it’s all about the process.  Get the trading process right and the money will take care of itself.  

Lastly, If you are fortunate enough to have some Risk Capital that you want to use for trading the financial markets, and you are new to trading or are still yet to be consistently profitable, then here are some options:

  1. If you are currently lucky enough to have one at the moment, DO NOT GIVE UP YOUR DAY JOB when you start trading.  Rather, learn to trade around your Day Job.  Unless of course, you are taken on as part of a Trader Apprenticeship/Graduate scheme run by a Financial Institution/Hedge Fund etc
  2. Get a Coach/Mentor/Accountability Partner.
  3. Trade in a Demo Account until at least the very least you have got your Trading Process (the mechanics) sorted or better still, until you have a proven track record of ‘paper’ consistent  profitability.  You can still keep saving whilst you do this.
  4. I would advise against funding your live trading account using a  Credit Card or Loan for obvious reasons.
  5. When you are ready to trade, only put half or a quarter of your Risk Capital into your trading account (Barest Minimum requirement would be £$1,000 but preferably higher, in order to be able to manage your Risk properly).  The likelihood is that you will initially lose money and it takes a while to get used to the different emotions around trading real money.  If you blow your account up, take stock, and if you still want to continue then at least you will have the financial choice of being able to do that. Remember that ‘Money is Neutral, It Is What You Do With It That Counts!’.

In the interim, I highly recommend that you read:

The Psychology of Money

by Morgan Housel