Why Trading Profits (Money) Should be Secondary?

Trading MoneySo I’ve been having a conversation with an old friend about various investment instruments in the market and why some investors struggle to make it (a term I use indicating that one is a successful investor) even though there are plenty of investments opportunities out there.

One of the topics that we discussed – which was something we both agreed on (as we don’t always agree with each other) was the fact that many investors fail to prioritise properly and to have a longer term view on what is required to be successful. More often than not, they like to use short term financial gains as their benchmark and they fail to understand the importance of focusing on the longer term rewards. Delayed Gratification was the term that my friend described and this is going to be the theme for today’s article.

Bringing this back into the trading world, to become a successful trader, there are things that are far more important than short term profits. In fact, you can pretty much ignore any one-off trading profits that you’ve made because they are just outliers. With that, the following are some reasons why money or profit goals should be secondary.

1         Trading is Probability Game

Many traders seem to forget one important fact about trading, and that is trading is a probability game – you only take a trade based on probability bias, you don’t know when you will make money or when you won’t. Yeah… yeah… many traders will nod their head and agree to what I’m saying now but not many traders can fully appreciated this concept.

Trading Probability

By that, I mean that traders who can fully appreciate the probability game, will NOT have any profit expectation on their next trades. More importantly, they know that a profitable trade today does not mean that they will make a winning trade tomorrow. Hence, these traders will not celebrate over one or two winning trades. Instead, they work towards longer term success and towards getting the probability in their favour. They look at their monthly or quarterly journal of 30 trades or more (pending on the type trader they are) before they conclude that they are performing within expected system outcome. They take some cash out, buy a beer (or a gift) and its back to square one in the new month. It’s a simple process, isn’t it?

Hence, if you believe that trading is a probability game, then you can see why making money (on the next trade) is secondary, can’t you?

2         Money Causes Trading Excitement

So you might have just made X% on your last trade and you are feeling rather excited and thrilled. Now what?

You see, the old and amateur me, would start looking for the next trade. Generally, this is what new traders would do. More than that, I would get excited and feel very confident about my trading ability to a point where I believe I can make the same amount of profit on the next trade. Thus, with that adrenaline in me, I would start taking trades that break my rules. I was showing a classic example of recency bias as well as being over-confident.

Without realising it, the emotions of such trader starts moving like a roller coaster. For those who realise what is going on, they would take a step back and pause from trading in the hope that they can readjust that emotions. While there are some traders who struggle to take control of themselves and that’s usually where their trading accounts go wrong.

If you were to read this again, do you realise that all it took was a little bit of trading excitement and trading started to go the wrong way. Do you realise that those little emotions like feeling proud and confidence over a winning trade (as oppose to the process) can cause unnecessary trading problems?

What many traders don’t realise is that making money from trading is not actually an issue. However, it is the unnecessary emotions that money can create which spark the problems.

3         Money is Just a Number

A profitable trading system is one that produces a favourable outcome and that outcome is usually described in percentage terms. For those who don’t realise yet, then you should know that one of the beauties of trading the financial market is that we can scale our trades so very easily.

For example, if I made X% in the last 12 months, all I needed to do was to double my trading risk and I can expect a returns of 2X in the next 12 months. In fact, the compounded effect of that is actually much more since I’m a short term trader. Do you realise what that means? It means, I can gain financial wealth very quickly. Of course, that’s only possible when I’m very confident that I have a good trading system and I am able to execute my trades with little or no flaws. And it has no relationship with how much money I made in the last 12 months.

In the end, money becomes just a number in the trading system. Hence, gaining new wealth is absolutely possible and, in fact, it is realistic. However, this is only possible when you have been working in the right area – which includes your trading psychology, risk management and money management.

Conclusion

Success TradingI absolutely understand that Money is the ultimate goal for many traders – including myself. However, traders need to realise that when training towards becoming a full time trader, money should only be secondary. The idea of delayed gratification in trading is crucial in the longer term.

Instead, be patient and focus on getting the process right. Learn to trade with a clear inner environment (including trading psychology and state-of-mind management) and work on a trading system that suites your personality. Once you mastered those areas, money will start filling up your bank account so fast that you wished you’ve done that earlier.  

With that, thank you for reading and happy trading!!

 

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