Good Vs. Bad Reasons To Trade
There are a lot of reasons why people decide to go into trading. Some do it for the thrill of the price action. Some do it for the intellectual challenge. Some want prestige. Some want the satisfaction of showing that they were right about their analysis. Some are doing it as a way to leave their 9 to 5.
You might be thinking that I’m going to go into the psychological reasons for trading. Demonstrate which reasons are good reasons to trade and which ones are bad reasons to trade.
Unfortunately, I’m not going to do that. The reason is because there is only ONE reason to trade:
TO MAKE MONEY!!!!
Deeper than you Think
You might be saying to yourself, “Well that’s obvious. Why did I bother clicking this article? What else is there to talk about?”
I want to emphasize this again: The ONLY reason to trade is TO MAKE MONEY.
So why is this worth an article?
The true reasons why we trade are often not related to making money. Our true, subconscious or hidden desires to trade are the true drivers of our decisions and actions. This is one of the biggest reasons why people are so bad at trading. They’re not really trying to make money. They’re trying to get the markets to satisfy a different desire, a desire entirely incompatible with being consistently profitable.
If you want to become a consistently profitable trader, you need to dig deep on understanding the true motivations to trade to get rid of it. This will allow you to remain objective to the true goals of trading while shedding yourself of the additional unnecessary baggage of your personal psychology.
If you don’t, these unnecessary reasons for trading will drag you down and make you do things that make no sense if you’re looking at your trading decisions on an objective level.
The Truth: Trading Sucks
Think about what trading entails on a daily basis. You read a bunch of things and crunch a bunch of numbers. You make a decision on what you want to do. Then you do it. And you may or may not make money. Nothing is guaranteed. If you’re good, you’ll make money consistently, but there will be losses. And if you’re not so good, you’ll be losing money consistently. Even worse, you could have been doing something else, anything else.
The mechanics of trading are also quite boring. You watch a screen for most of the day. You sit on a chair all day long. You’re not too active. You also don’t generally talk to other people on a regular basis.
What about the stress levels? Trading is very stressful at the worst of times. What’s even worse, the more stressed you are, the less likely you’re making money (who gets stressed trading when they’re making money?). So you’re not physically active, you’re stressed, staring at a screen all day, sitting at a desk. If you’re lucky, the chair is comfortable. If you’re not lucky…well, you might need a chiropractor in the distant future.
The Glamorous Life of Trading
Trading is often advertised as glamorous. You can make big money and be free from the 9 to 5 grind. You make money on your terms. You can make a lot of it too. You can do it on the beach, you can do it in another country. The world is your oyster. You set the terms of your life and trading just does its thing.
There is also a bit of prestige to successful trading. You’re seen as intelligent, outsmarting everyone else in the market. If you do well enough, you may start working for a big name firm. The sky is the limit as some of the richest people have been amazingly successful traders. What’s not to love? Why doesn’t everyone trade?
The Truth about Life
The truth about life is that for the majority of us, it sucks. It’s hard to make ends meet. It’s hard to catch a break. If you were blessed with being born in the right country, or born in the right family, you’re lucky, but you’re still not guaranteed success.
The chips seem stacked against the average person. Inflation, bad financial advice, complex financial instruments, scams galore all seem to to be one of the many ways the average person fails to build wealth over time. The common wisdom is to become rich slowly, invest long-term, buy and hold for many year, let compound interest work for you…Until you find yourself ready to retire in the middle of the Great Depression, the 1973 OEPC Oil Crisis, the 1997-1998 Asian Crisis, the 2000 tech bubble crash, the 2008 financial crisis.
But markets always rise. Unless you invested heavily in the Japanese stock market in Oct 1989. Then you’re just breaking even.
Life is complex, confusing, and full of consequences that seem random and unfair at times.
But trading can be your ticket to getting what you deserve. It can be the skill that gets you out of the rat race. Trading can be the one thing that can free you from society so you can be your own boss with unlimited wealth and resources at your disposal. All you need is to buy and sell at the right times. You can do it because you’re smart/talented/driven/wise/cunning/etc. The stock market has the ability to solve ANY problem for the right person.
The Relationship between Trading, Money, and Psychology
The ONLY reason to trade is TO MAKE MONEY.
That is the only relationship between Trading and Money.
Trading is meant to make you money. So if it is not making you money, you need to change in order to learn how to make trading make you money.
However, money is not just money. Money is rent. Money is food. Money is social status. Money is clothing. Money is dating. Money is freedom. Money is prestige. Money is evidence of worth. Money is security. Money is safety. Money is protection of family.
Money is the solution to so many problems or the fulfillment of so many dreams.
Money is so much more than just money. Money can become anything you want it to be. And money becomes whatever our fantasies allow.
But…If Money = Fantasy
Let’s take a look at this statement:
The ONLY reason to trade is TO FULFILL OUR FANTASIES??
Does that make sense to you? On an intuitive level, does that make sense? Does it make sense that the market should be there to satisfy our fantasies? It exists for the sole purpose to satisfy our wants and desires?
I hope it is clear that this is wrong. But how did we get here?
Of the only reason to trade is to make money and money satisfies our fantasies, why does everything fall apart when I replace money with fantasies?
Trading for Money, Nothing More
Trading is difficult as it is. The most difficult part of trading is taking on risk. The risk is the money you put on a trade. When you lose money, it hurts. When you make money, it feels great. For the experienced trader, this back and forth between pain and pleasure should soon feel like an everyday occurrence. It should soon feel like nothing at all.
However, what happens when you add MORE pain to the equation? How do you add MORE pain? Well, if the money that you lost represents a vacation, or your rent, or your prestige, then the pain you feel is far more than just the dollar signs leaving your account. The fantasy worsens the pain because it has a substantial existential and spiritual meaning to you. It hurts you at your core.
This is especially the case when you want to be “right”. A lot of people who start trading develop a trade idea and then put on a trade. The trade idea is theirs and they feel proud of the research they put in. Then, suddenly their idea goes sour.
They start losing money. But it’s not the money that hurts. It’s their pride, their wounded intellect, their sense of self. That is a far greater pain than the money. If not handled properly, it leads to revenge trading, over trading, doubts in future trading, confusion, and a whole host of unnecessary thoughts and emotions.
What about the reverse? What about when you start making money? Well, to the inexperienced trader who sees money as fantasy fulfillment, they feel great and amazing! They start seeing themselves driving Lamborghinis, drinking champagne in yachts, and a whole host of other things. Or maybe they see themselves buying a new home, or perhaps getting into the prestigious hedge fund they always wanted to go to. Dreams are powerful psychological drivers of our behaviors.
It feels great, but at what cost?
As you have more and more profit, you become more and more anxious. Those are your dreams on the line. And you’re tempted to cut the position. Possibly too soon or possibly just in time. It’s hard to say. You can only tell after the fact, right? (Nope. Not right).
Trading ONLY for Money
There is only one reason to trade. That is to make money.
Therefore, every action you take in trading should be focused only on how to make money.
But how do you ensure that your trading is hyper-focused on only making money?
Step 1: Take some time to understand yourself
Take some time to understand yourself, understand why you trade. Make a list, reflect on your life. Focus on what money means to you and how trading potentially fulfills that.
To the extent that money and trading provides you with more than just a way to make money, you need to get rid of it. How do you get rid of it?
That’s potentially the hard part. But there are 2 ways:
Get a Therapist – preferably ones that focus on trading
Invest in a strong trading process where you can let go of extraneous considerations of your trade ideas
I know what you’re saying. (1) and (2) sound expensive. And the truth is that they are. But they’re effective as well. If you’re looking for a do-it-yourself option, I might need to write another article on how to uncouple your relationship with money from the fantasy of having money. But, if I’m being honest, that type of article will unlikely get a lot of views as it’s such a specific and awkward thing to go into with regards to the psychology of trading.
I might end up doing it if there’s enough interest. But for now, I’d have to simply suggest a lot of self-reflection and focusing on the quality of your decision making (Step 2)
Step 2: Hone your decision making and learning process
Trading is all about making decisions. That’s the entirety of the activity. The higher the quality of your decisions, the better your trading will be. Honing your decision making is highly connected with the learning process. This topic alone is complex and probably deserves its own article (or series of articles). However, I want to talk about a very important concept that most new traders aren’t aware of:
Do not analyze the quality of your decision based on the results of the decision. Analyze the quality of your decision based on the information and situation available at the time of the decision.
This is the best way to learn while you trade. Most people make the mistake of taking an action and then concluding the action was good because you made money and bad because you lost money.
Wins and losses are important to track and reflect on. However, you cannot learn what your next action should be if you train your brain this way. Why?
How do you expect your next decision to improve if it is based on information that happened in the future (hindsight)? You can only improve your future decisions if you reflected on your past decisions based on the circumstances, information, and events that happened at the time of the decision, not based on the result.
If you want to learn more, this is called “resulting” or “outcome bias”. It’s a very common bias that occurs, especially in the trading context. Again, I probably need to write a separate article on this.
Step 3: Let go of yourself. Focus on the markets instead
You will have hopes and dreams, fears and anxieties when trading. This is natural. Over time, you’ll need to let them go because your personal hopes and dreams, fears and anxieties are irrelevant to the market you are trading.
The market you are trading has no idea of you, who you are, what you want out of it. So those aspects are not helpful in your analysis of what you should do next.
Should you buy or sell? What is the market doing?
Should you hold your profits or bank them now? What is the market doing?
What should you do about your slight loss? What is the market doing?
You are irrelevant to the decision-making process on how to trade. The ONLY reason to trade is TO MAKE MONEY. Therefore, if the decision you made does not make money, you should change it so that the decision you make is able to make money consistently over time.
Focus on what the market is doing. And based on what the market is doing, focus on the decision that makes the most money. Take the action with the best Reward to Risk ratio. Let go of everything else. If you don’t, you will be holding yourself back.
Summary
The ONLY reason to trade is TO MAKE MONEY.
Money fulfills our fantasies, but markets do not.
In order to disconnect the relationship of your fantasies to making money, consider this 3 step process
- Step 1 – Take the time to understand yourself.
- Step 2 – Focus on honing your decision-making as part of a larger learning process.
- Step 3 – Focus on what markets are doing, not what it can do for you.
Your trading psychology might be the deciding factor for your next BIG win or your next BIG loss.
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