Why You Can't Trade With Scared Money

You are the average american guy, maybe in his 20's or 30's and you work in a cubicle at work. You pull down maybe 40-50 thousand dollars. Perhaps you are in Information Technology, or a support position at work. You are working your way up, you have dreams. It would be great to start your own business, but for now you are getting by. A 401K, some money in the bank and your credit cards carry a balance. You are married, your wife is also working and perhaps a baby is on the way. You really need more money. But how?
You have a buddy that works across town at another company who has been trading the markets and has been doing pretty good. Hes been doing it for about 5-10 years now and he has used some of the profits to buy a new car and put an addition on his house. You want what he has, to trade like he does and have a proficiency in the market.
So you investigate and see how much you can scrape up and you come up with about 2g and open an etrade account. The day arrives and your account is ready. You look around some finance sites for prices for the stock that you picked over the weekend and then you check to make sure the market is trending up. Satisfied, you place the order on your smartphone. Success! The order is in. You are excited because now you are going to be making money on the side hopefully things will continue to expand in your life from this point. You then go to a business meeting.

You check your phone after the meeting. Hmmm. The stock lost quarter of a point and is trailing downward. Annoyed, you concentrate on other tasks at work. You then check your phone 39 times for the stock price before you leave work for the day. You stare at it all the way home on the train and think about it all night. Your wife asks whats wrong, you seem a little distant. Nothing, you say. You turn on the computer in the den and really look into things. The market, you stock, its news. You then turn in for the night. The next day the market is up a bit and your stock wanders up a point above where you bought it. You feel exhilarated. Things are working out. After checking it all day and evening the next day comes.
As you are eating breakfast looking at the premarkets you see the commentaries from the talking heads how the Tokyo markets had a problem last night with in depth reports. You then look at the premarkets and the futures and they are all in the red. An uncomfortable feeling spreads across the back of your neck. You have a nervous bowl of cereal, and then its off to the train.
When you get to work the markets have been open for 15 minutes and they are off. Way off, with the Dow down 175 points. There is talk of halting the markets for a bit then turning them back on, the safety breaks that the Dow and the markets now has in place. You check your stock, its down 12% from when you bought it. You do the math. Thats over a 200 dollar loss on your 2 grand. You let that roll around in your head as you go to another meeting at work. Blah Blah Blah Blah says the guy running the meeting as you look at your pen and while taking a sip of water you wonder if this is going to pull out. Then you start thinking about the money. You had 2,000. Now you have 1,7?? something and you are unsure of whats happening in the market. Can't pull out the cell in the meeting.
After the meeting you head back to the bathroom and sit down in a stall and look at your phone. Oh my God the market is still dropping. And now your stock is down 18% of where you bought it. You see an analyst talk about how the market is going to turn bearish for a while as we had a strong pull upwards for the last 2 weeks. You can't lose this money. You start to think about all the things you could use it for. Your eyes dart left and right thinking about the money. You have those 2 bills. You have a school loan payment coming up. Mortgage. Car payment. You just can't light this 2 grand on fire. You NEED it. Sure you wanted to make money with it, not LOSE it. Oh god Oh god Oh god.
In a panic, you sell. The market maker executes the order within 60 seconds and you refresh your trading account to see your updated cash balance: $1620 including in and out commissions. You breathe a sigh of relief. At least you didnt lose everything. You do some math in your head and figure what you will pay off with the remaining balance in your trading account and then get up and finish the rest of your day.

This Guy Had No Business Being in the Market

1. No idea what he was doing

2. No Burn Money

3. Didnt understand entry and exit points

4. Traded with the crowd not against the crowd

5. Got his information from mainstream sources

6. Could not afford to lose the money

Lets address the above points:

1. It took me 15 years to figure out what I was doing. 15 years of trial and error. This of course was partly part time, and you can shorten this to min 3-5 years if  you really concentrate on it. What you need to do is paper trade and see if how you are trading works. That means investigate a stock or portfolio and take an entry ponit as if you were using real money and see if you make anything by the time you exit (on paper) the stock. Over an average of a few months, are you seeing a profit on paper? If not, back to the drawing board. Dont use real money until you do. Remember, the stock market is rigged against the regular guy small fish using an online trading account. For the 10% of the pros who make the money, someone has to lose.

2. and 6. These points will be combined. You have to be willing to let the entire 2 grand burn right to the ground. If you are not willing to trade like that, the fear of loss will cause you to trade too carefully and take a loss. Lets say you know what you are doing. First, you wont get in on a market high like the guy in the example. Second, after learning about the market you will realize that usually during a market climb there are pullbacks, like the waves on the beach. When the market/stock pulls back you then wont freak out and sell and take a loss just to have the market roar back and continue to climb the next day while you watch the train pull away from the station. 

If you have bills and other obligations those come first. You cant trade with your head screwed on tight when you are fearing loss because you have other things you should be using the money for:

Rent, Mortgage Payment, Food, If you can afford to light the money on fire, then you are ready to trade with it.

Burn money is money that is replaceable. Did you scrape up that 2 grand over the course of several months? Take it off your credit card that has a 5 thousand dollar limit? How long would it take for you to replace this money? Generally you will want to be able to replace it by minimum 2 weeks in case you flash burn it. If you cannot, then you do not have burn money and you will be trading scared, which will influence your trading. The guy in the above example needs to be trading with 100 dollars in order to have replaceable burn money. However, you cant do much with this kind of small money. You really need about 4-5 grand to start. And have it be replaceable burn money.

Well, that aces me out, you think. I dont make that much. In that case, you need to place 90% Contrarian bets in the market. More on that in a later post. When I write this post, I will turn that last sentence into a clickable link. It will be linked into an article I write on how to do that.

3, 4 and 5. These points will also be combined. An average person will wait until the market surges upward and then get in. Why? They don't want to miss any money and the see the market going up. Greed. They then get in and then the market swings back down. Then they don't want to lose any further money and so they sell. Fear. This creates a situation where people buy high and sell low, the exact reverse situation that people need in order to make money in the market. A contrarian trader knows that the market moves in waves and he knows how to read a technical analysis chart. When the market surges upward he waits. When the market surges downward and everyone is selling, he buys. When the market surges back up, he sells.

Want to know more? I have a video that I made that goes into all of this in detail. Yes, the production is rather amateurish but I STRONGLY advise if you are serious about shortening your learning curve to watch this all the way through, and turn up your volume. Every point that this video makes is spot on and has the potential to turn you into a much better trader. Don't try to watch this at work, set aside about 20 minutes at home. Get a drink, get settled, And learn some pretty interesting things as to why the market seems to suck money out of your account.

So watch and learn and pull out of that trading dive. Anything I can do to help? tradinginsider@yahoo.com