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Trading by definition is uncomfortable. You are taking risk on an unknown outcome betting money each time. It doesn’t matter how many times the setup worked in the past. The market has no memory and the future is never quite like the past. That’s why every trade is tension. Every trade is pressure. Every trade is stress.
A lot of gurus will try to convince you that trading can be easy and relaxing. They’ll claim that you can just get into “the flow” and succeed without worry. I’ve done more than 20,000 trades over the past decade and I don’t think I’ve ever felt relaxed during any of them, unless I was dead asleep. (Even then I have an uncanny ability to wake up on demand when a trade triggers in Asia -- a trait that has saved my account unnecessary losses on more than a few occasions).
Trading may be exciting, it may be challenging, it may be intoxicating but it is never “fun” the way floating on the ocean in Miami Beach is fun or the way drinking an espresso at a sidewalk French cafe is fun. Trading always requires focus and effort. Which is why your most precious capital is not money.
The term “mental capital” is bandied about by traders all the time -- but what does it really mean? It simply means that you have only so much intellectual and emotional focus on any given day and if you spend all your time nursing a losing trade, you are not only wasting money but much more importantly depleting all your mental resources as you set yourself up for market slaughter.
For those of you who saw “The Big Short” -- Mike Burry, the Asperger challenged hedge fund protagonist of the movie is portrayed as the lone hero who stood up to Wall Street and made a killing shorting subprime debt.
In truth, he was a lucky idiot.
It didn’t matter that Burry was ultimately right on the market . It didn’t matter that Goldman and Morgan outright cheated him by keeping the marks against his positions artificially high. It didn’t matter that he ultimately collected more than a billion dollars. Mike Burry would have been swept into the dustbin of history if he didn’t have the quirk of fate to lock down his investors’ funds and essentially keep them hostage, avoiding a capital outflow that would have liquidated all his positions before they paid out. The scene in the movie of Mr. Burry lying on his office floor staring at the ceiling in despair anguish as his Net Asset Value contracts by double digits is a classic example of “mental capital” being depleted.
Now I am really glad Mr. Burry got paid. He seems like a very smart, decent man and he certainly was correct in his analysis. But we as retail traders don’t have a billion dollars of “waiting money” at our disposal. We don’t have the legal right to lock down our brokers “redemptions” of our funds.
Our margin calls are final and generally terminal and the damage they do to our psyche is often far greater than the damage they do to our bank accounts. Which is why nursing a losing trade is NEVER WORTH IT. Even if you win. Because all that means is that you will lose it all and then some -- the next time.
There are only two ways I know of preserving your mental capital. Trade a 0.01 lot or trade with a stop. It doesn’t matter how unfair it is. It doesn’t matter how much capital it cost you. It doesn’t matter if it will take you a month of trading to recover the stop loss. The moment you take a stop you free up not only your money but also your mind, and in the end that’s priceless.