Active-Trader - The Mind of the Trader

Welcome back Active Traders.

Back on 5/22/2013 John Carter did a video on the Simpler Options web site on Trader Psychology. This video lasted only 16 minutes and 34 seconds, but it spoke to me more than anything else about what limits me as a trader.

Talking about your own limitations in a painful topic and I typically avoid it like the plague, particularly on my own blog where I always want to appear smart, in control and always making money. But that's the only way I'm going to advance, so let's get started.

First a little about me, I'm a 50-something male with a house, wife, mortgage and 2 kids, one of which just went off to college.  I have been working steadily as a technology specialist for large corporations for the past 25 years or so.  I am the epitome of financial responsibility with no debt (except for the mortgage on my house) and a respectable net worth for someone my age.  About 60% of my net worth is retirement assets put away diligently through payroll deductions. So far so good, so what's the problem?

The problem is my trading performance.  Almost regularly I under-perform the SP-500.  This year is a case in point where I am up about 6.6% in my taxable account and about 7.7% in my retirement accounts versus 14% in the SP-500, and that's on the E*Trade side.   On the TradeStation side, I am up about 3%. At my equity high, I was close to 5%, but I seem to be having a very difficult time getting out to a new all-time high.

I am never going to make it as a full-time trader with performance like that, and I'm not even sure that being a full-time trader is what I want.  But I have told myself I'm not going to leave my full-time job until I am making more money trading then through my regular job and I am clearly miles away from achieving that goal.

I have tried plenty of methods to make money, all of which were based on what worked for me in the professional world. Here's a quick recap:

• Automated Forex Trading on Zulutrade with the results chronicled here.
• Automated Forex Trading on MT4 with results chronicled on the accounts on the right side pane of this blog.
• Various methods of system trading none of which produced anything worth risking my hard-earned assets.

Bottom line is none of those methods produced returns worth the effort it takes to carry them out. Algorithmic trading may work in the land of high-speed trading, but it doesn't work for me.

So now that we know what doesn't work, what does?

First regarding my performance, I shouldn't be so hard on myself.  After all, the world of money management is littered with those who can not out-perform the market and since trading isn't even my full-time job, why should I be any different?

Well all expectations changed with the arrival of John F Carter.  I always told myself I couldn't venture out on my own as a trader as long as I have a financial responsibilities of a wife kids mortgage, etc.  But here's a guy who is younger than me, certainly less technical and probably less educated than me but who regularly withdraws about 2% a week from his accounts.  Last week, (when he was on vacation in Italy) he wired out about $35,000 which is about 2% of his low 7-figure trading account.   Based on that, he can earn about 1.75 Million a year and still keep his account hitting new equity highs. In his own words, he treats his trading account like an ATM machine.

Before the arrival of Mr Carter, I would have told myself that this type of performance was not possible,  but he regularly provides undeniable evidence that it is possible. And the video above speaks to what limits me as a trader.  What's even more amazing is that JC seems to go about his life in an almost entirely stress-free manner.  He cares about the money, but it doesn't seem to cloud his thinking in the least.

So let's get right to my limitations:

- I am analytical by nature and I consider life's problems to be a puzzle.  The presence of the puzzle leads me to a state of higher stress and uncertainty,  and resolution of the puzzle leads me to a state of lower stress and uncertainty.

- I am extremely financially conservative and would rather work hard to earn $1 with a 100% degree of certainty than to work 20 minutes for 60% chance of either making $1 versus a 40% chance of  losing $1.

- I am attached to the security that having money in the bank brings, and therefore losing money is more painful to me than making money is pleasurable, particularly if I have to risk money to make money.

As JC put it in the video above, Trader Psychology is the final frontier in trading and you are not going to advance as a trader unless you address the self-limiting beliefs that hold you back.  In my case, I have a strong need to "be right" and for me being right means making money and not losing money.  

I want to end 2013 with a positive balance in my TradeStation account to prove that I am "right" and can make money trading.  Unfortunately, this need is so strong that I am always trading like I am just one trade away from poverty, when in reality, nothing could be further from the truth.  

To make money, you need to stay impartial.  If fear of loss dominates your state of mind, then your mind will manufacture fearful solutions.  Fear of loss clearly dominates my state of mind (at least in my TradeStation account) and as a result, I have a lot of work to do before I can become consistently profitable as a trader.

Sure, having the right indicators and setups and execution is important.  But most important is your state of mind when you are trading. Unless I overcome that, I am never going to advance as a trader.

Enjoy your weekend while I address my inner daemons.