7 worst trading mistakes #5: Scared money

Elephant sand bathYou’ve heard the expression, “Scared money runs away from you.” The more you worry about losing money, the more likely you are to lose it. The low volumes, high volatility, and unclear direction of the stock market over the past five days says there’s a lot of scared money out there.

Danny Riley wrote about it yesterday and we saw it all day in the MrTopStep Trading Room, where the collective intelligence helped a lot of us stay focused and make money. But outside our room, we knew many traders were getting chopped up.

When you learn advanced driving skills and find yourself heading straight for a wall, the instructor always tells you to look at where you want the car to go, not what you want to avoid. If you look at the wall, you’ll hit the wall. If you look at the spot you want to get to, sure enough, you’ll turn and avoid the wall.

Don’t think of a pink elephant. What did you just think of? Your brain tuned out the other words and went straight to something it could see.

A row of pink elephants, up on their hind legs, dancing in a conga line. See how easy it is?

So if you’re trading and you don’t want to think about losing money, the worst thing you can do is tell yourself, “Don’t think about losing money.” Your brain will only register “losing money,” because that’s what it can see and feel.

You need to give your mind something else to focus on. Something vivid, something real, something it can hold onto.

In India, the mahouts, elephant trainers, have an old trick for keeping an elephant from grabbing fruits and swatting people with their trunks when they take them on parades. They give the elephant a stick to hold in its trunk, directly in front of its face. The elephant will simply keep holding the stick no matter how many banana and mango carts it passes.

Your mind needs the equivalent of that stick. It’s the trading plan and checklist I wrote about yesterday. Here are a few things you can add to that checklist to make sure you aren’t trading scared.

  • Are you truly using “risk capital”? Just because it isn’t the milk money doesn’t make it risk capital. Even if you could afford to lose it and still be okay, be honest with yourself. You should be able to throw that much in cash out of a moving car and not miss it one bit.
  • Would losing the money cause problems with your family or friends? Are you trading with other people watching? The lead traders in our trading room do a high-wire act every day. They put their trades out as they are making them. If they have a day of losers, everyone will know. But that’s part of teaching our members how professional traders work.
    Maybe that’s why so few trading gurus put their trades out for the world to see. At MrTopStep, we won’t do business with anyone who isn’t prepared for our total transparency. We wish them well, but we don’t believe they’re ready.
    If losing your risk capital will lead to relationship problems, if you have to make money to send kids to college or pay the bills, that’s going to make it harder to trade. If your reputation or relationships are on the line, even money you could afford to spend on useless toys suddenly becomes scared money.

When you do lose money—notice I said when, not if—do you have a plan to absorb it in a creative and positive way? Start with the words you use. Don’t say, “I f$#^&d up.” Be specific.[pullquote]Michael Jordan winked at me, then dribbled, paused, then swoosh. That was his free throw checklist.[/pullquote]

There are specific steps that lead to a losing trade just as there are to a profitable trade. What were the specific steps you took that led to that outcome?

Don’t say you were unlucky. Luck has very little to do with good, consistent trading. When you’re in the zone, in what psychologists call a flow state, it can feel like luck. Time slows down, you have no fear, you’re focused and calm. But that’s a mental state anyone can enter at any time. Most of us just don’t train ourselves to do it.

The best athletes know how to overcome fear by entering a flow state. In college, I once found myself alone in a gym with a young Michael Jordan, who was practicing free throws. Over and over, he dribbled the same way, paused the same way, and swoosh. Nothin’ but net. It was like being with a Zen master.

When he finally missed one, he didn’t react at all. He got the ball the same way, got back in position the same way. He finally saw me watching him. Michael Jordan winked at me, then dribbled, paused, then swoosh. That was his free throw checklist.

(He famously showed in one game that keeping his eyes open was not on that list. He closed his eyes, sank the shot, then turned to a rookie and said, “Welcome to the NBA.”)

In much the same way, the best, most consistent traders have a checklist that becomes second nature to them. They enter into a flow state (which I can tell you from experience is immensely pleasurable), then they walk into the market and pull money from the markets virtually at will, like the market is their personal ATM.

If they lose, the trade lost; it doesn’t mean they are losers. They see the loss as part of a larger story of success. It’s tuition paid for their ongoing education towards mastery. If you learn from each mistake, the money becomes an investment in your education. Think of it that way.

If you can train yourself and internalize the checklist you want to focus on, you’ll spend the trading hours in a happy flow state. Fear and worry will just blow past you like a light breeze and you won’t get tempted to let them control you. You’ll be a happy warrior.

If you ever need a way to remind yourself to focus on your checklist and trade in flow, just think of an elephant.

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