Once you have made a few real-money trades and practiced carefully following your trading plan, you’ve started your journey towards financial freedom. We encourage you to temper your expectations with patience and resolve as you commit to persevering along this path. Life will want to pull you back into old habits and derail this journey before it even begins. This module will help you recognize and avoid pitfalls and speed your journey by helping you keep going even when it’s tough.
In this next phase of your journey you should carefully work on these three areas:
Lots of things in your life will seek to pull you back to the status quo of your current situation. Let’s face it, we all prefer the comfort of our routine. But that is the point. You want something you don’t have (financial freedom) and that requires that you do something you aren’t currently doing. You’ll face resistance as you change your routine to achieve your financial goals.
Expect this resistance to manifest into your life in one or many ways. It may not be anything dramatic. It might show up as simple distractions such as that coming from the TV, or it might show up from friends or family who don’t understand your resolve and may not support your efforts to achieve financial independence through trading. It may show up as physical emergencies, pressing job demands, or unexpected home repairs that will sap your time and emotional energy. This resistance to change will also likely include your own emotional reactions to how your trades play out, which may trigger your own thought processes that move you towards general anxiety or negative self talk. This resistance may also show up as an increased tendency to break the rules you have articulated in your trading plan.
Any of these can weaken your resolve to continue learning, continue improving and continue trading. You will be well served to guard against the tendency to give in to the resistance you’ll face.
Your continued progress depends on your ability to accurately and unemotionally assess your results as you focus on the plan and not on the outcome of any individual position. Focusing on how well you follow your plan helps you avoid emotional responses to wins and losses in the markets and reduces the tendency to make incorrectly biased decisions about current positions or future trades.
One of the most difficult obstacles people face when trading real money is their own emotional responses to the ups and downs of their positions which create unnecessary blind spots and losses. Getting into a routine of emotional preparedness helps keep these emotions from unnecessarily whipsawing you into or out of trades outside of your system’s parameters.
Start with a clear understanding of all of the parameters of your chosen system and the probability profile that best fits your personality. Work to prepare yourself emotionally for expected winning and losing streaks and the potential percentage gains (and losses) from them. Keep these firmly in mind and embrace the structure of your chosen system as you begin getting more serious about putting your money to work.
Your emotions can easily be upset by a great many things. If you feel stressed by things that happen to you, consider not taking trades until you can get this stress under control. Perhaps someone close to you expresses disbelief at your ability to really make this work. This statement may undermine your confidence and affect your ability to stay the course during a loss or two. Lots of other things outside of you may affect your mental and emotional state. Be mindful but not paralyzed by these sorts of stimuli and the negative affect they may have on your body and mind and your trading.
Your emotional equilibrium may also be upset by things internal to you. That is, you may have a habit of negative self talk which affects your confidence. You may tend to react emotionally to losses or big gains which negatively impact your next trades. It may be hard for you to switch focus from account size or individual position profitability to your annual percentage gains.
Each of us are different and different things will seek to pull us back into the status quo. Don’t let them! Establish a set routine of things you do every day to help you bring your best self to the markets. The routine might include such things as going to bed and getting up at the same time every day. It might include an exercise regimen. It could include multiple self “check-ins” a day to monitor your mood, your self talk, your confidence, or your emotional response to unsupportive comments from others. It could also include tracking your diet which does affect mood.
Real success in the markets comes from having an edge as we’ve discussed in previous lessons. This edge can be things you do every day to avoid big losses from careless mistakes. A pre-market, during market and post market routine to prepare and monitor your mental and emotional state helps you make better decisions and helps you focus on following your system exactly during your trading day.
There are times and events in your life which cause deep emotion. You might also feel deep emotion during the daily fight to wrest profits from the markets. If you find yourself deeply emotional about anything, put off your trades. Successful people have developed emotional habits to help them approach the markets in a repeatable way. If they can’t find their emotional balance, they don’t trade.
Developing the ability to “do what you know you should do” and remaining unemotional or mechanical in the markets takes some practice. Monitoring your emotional state and working to stay centered and focused on applying your rules regardless of individual position outcomes will give you a repeatable approach to the markets with strategies you trust leading to results you come to expect. This is confidence in trading.
Successful people in all walks of life develop routines to help them achieve their desired results. Mental and emotional preparedness are important ingredients to your market success. So too is developing the hard skills necessary to implement your trading and investing system. If you haven’t already done so, take some time to write down your trading rules. We keep encouraging you to create a trade plan and establish rules you will follow in your trading because it’s such a foundational part of success. Below are some ideas to get you started:
We’ve already said that if you fail to plan, you plan to fail. It’s also true that only if something is measured can it be improved. Journaling is therefore critical to your market success over time. Journaling can include things like, Date, Day of Week, Hours of Sleep, Exercise, Mood, Diet, System Trade Rules for entries and exits (and whether you followed them), Type of trade, Support/Resistance, and anything else you feel important to track to help you keep your emotional equilibrium.
The emotions of fear and greed are the biggest obstacles to your success as they will whipsaw you in and out of the markets at the wrong times. Journaling helps you analyze how much fear or greed might have played a hand in your decisions and therefore helps you learn to better control these emotions over time.
Another important but often overlooked element of establishing a routine is getting comfortable with a broker. Once you’ve opened a brokerage account, place enough paper trades of various types to get comfortable with the technology of opening and closing positions. Competence with the tools of trading removes a friction point that might inhibit your success as you continue using real money.
Finally, be sure to keep your workplace organized and free of distractions. Keeping your space uncluttered helps you keep your focus where it should be: on following your system to get repeatable success from the markets over time.
You may feel like you’re in the middle of a battle during live market hours. The pressure, the noise, and the confusion can become almost overwhelming. So before you begin your day, take some time to mentally prepare for the fray.
This includes taking time to review your trading rules. Reading these rules every day may seem like a small thing of little or no consequence. But it matters. Times will come when you have to make decisions quickly and ingraining these rules deep into your psyche will help you follow them because your gut will be trained to follow to react by following the rules. Just like a pilot spends hundreds of hours in a simulator preparing for an emergency so that they can respond automatically and accurately to solve the issue.
After you have reviewed your trading rules, take some time to visualize your day. Visualize yourself following the rules for getting into a position and following the rules to get out of the position. Most people tend to visualize a desired outcome and then continue dreaming into the future. This is not visualization…this is fantasy. As you visualize successful outcomes, work backward and mentally create the steps needed to get those results for that trading day. Then work forward creating those steps in tangible reality.
At the end of every trading day, take some time to review your outcomes. At this point, it’s tempting to tally your profits and losses for the day and to feel successful if you made money or like a failure if you didn’t. Don’t fall into this trap. Remember, outcomes (profits and losses) from any individual trade (or even a few trades in a row) are expected and really don’t matter to your success over time. Instead analyze whether or not you followed your rules. Check in to determine whether or not you were able to remain unemotional as you entered and exited positions. Your confidence should grow as you follow your system and begin to see repeatable success.
Be cautious as you transition to real money. You don’t want to start this journey feeling like you need to catch up your retirement in one or two trades. That kind of pressure will cause you to make mistakes. Success takes time and patience as you persistently follow your rules for entering and exiting trades.
Hopefully your success in paper trading gave you confidence in your chosen system. But using real money changes things. Show patience as you begin by starting out using just a small portion of your account even though you may feel a need for massive returns. Open small positions and then closely manage your trades using your rules. Risking a small amount of real money will create the same emotional reactions as using larger dollar amounts.
At this point, it’s not about achieving massive profits or bragging rights. Smaller positions sizes are a safer way for you to understand and better prepare for your emotional responses to the wins and losses you’ll see when following your system.
It can be hard to discipline your emotions even as you place your first trade let alone as you watch your trade move up or down in value. If you find yourself in this situation, let us encourage you to simply, “keep calm and carry on.” Starting with smaller sized positions helps you focus on developing the emotional control to follow your process without risking too much of your capital. And as you gain more experience and confidence in your ability to follow the rules regardless of position outcomes, increase your position sizes.
We like to tell people to be patient before the trade and to be patient in the trade. It might be tempting to break your rules and chase after stocks. But don’t allow yourself to enter positions outside of your rules. The market will come back and there is always another opportunity to follow your rules for entries.
The same desire to break rules may come once you are in a trade. Sometimes the memory of previous losing positions is so strong that it becomes more tempting to get out after a small profit just to avoid a possible loss. Don’t break your rules for exiting a position. Give the position time to develop and let your profits run until your system tells you to get out of it.
Putting your money to work in the markets successfully is a great way to increase your wealth and have a more enjoyable lifestyle now and in retirement. But don’t get so caught up in that dream that you rush into poorly conceived trades. Be patient, follow your rules, discipline your emotions and stay consistent.
If you run into a few losses in a row, stop trading for a bit and analyze your journal. Your goal is to diagnose potential mistakes you’ve made or a directional shift in the market that requires a shift in approach.
There are three kinds of specific issues you look for as you review your journal looking for mistakes you might have made. Errors in any of these areas will require a change in you before you can see improvement. If there are no errors in any of these three areas, the issue may be a shift in market which may require a change in strategy and approach. Having a journal, reviewing it carefully (and frequently) and using the filter of these three items below helps you stay ahead of changes in the overall market to continue positioning yourself for success.
Execution errors: As you review the trades you’ve journaled, ask yourself if you followed all the rules for your system. Did you review all the items on the checklist you created? Did you place the right kind of order for the right kind of asset class? Did you enter early or late based on the market structure or technical analysis you follow?
Decision Making (Cognitive) errors: There are times in trading (especially when just starting out) when it seems like the brain short circuits. Sometimes the urgency to get into (or out of) a trade is so great that mistakes are made because we are literally blind to anything else. As you review your journal ask yourself if you made wrong decisions due in part because of mood, a lack of exercise or poor diet or simply poor thinking.
Psychological errors and self-sabotage: Some people have a subconscious sense of their financial worth. This limit acts as a sort of “glass ceiling” which frequently contributes to poor decision making which shows up as “letting your losses run and cutting your profits short.” As you review your journal, look for instances where you didn’t get out of something quickly enough or where you got out of it too quickly. If you find evidence of these issues in your results, recommit yourself to following your rules and try to put blinders on both internal and external stimuli that might try to pull you away from following your system exactly.
No investor or trader is right all the time. Even the “Who’s Who” of Wall Street is filled with people who guessed the wrong direction, who experienced losses, who lacked confidence, and who initially struggled to follow their system exactly. You are not alone in your imperfections so don’t beat yourself up about them. Learn from mistakes, continue disciplining yourself to follow your system and stop being swayed by individual market outcomes. As you close each position, adopt the “Next!” mentality…you don’t care if your last trade was a winner or a loser…you’ve already moved passed it onto the next trade. Don’t let the previous trade affect your next one.
If you find yourself struggling with decision making errors, develop a structure of reminders, checklists, or triggers to help you make better decisions. You may find that setting your entry, your stop loss, and your profit target (exit) is better done before you enter the trade. If you make these decisions before the trade, work to follow them exactly while in the trade.
Investing and trading can act like a fillet knife cutting you wide open and forcing you to face your fears, self doubts, negative attitudes about money and the self-sabotaging emotions of fear and greed head on. Though painful, this is actually a good thing. Former patterns of behavior and emotional response have limited you and your financial future so don’t cling to them.
As the pressure of putting your money to work in the markets builds, use it to shape new emotional habits. Learn to act according to the rules of your system and not react in the markets based on your own emotional responses to market moves. As you do, you’ll find your awareness of and ability to take advantage of opportunities growing. This is great! Now keep going. Eventually, you’ll see increased success in your efforts to put your money to work in the markets.
There are two main parts to financial empowerment. The first is income generation and this is where most people place all their focus. However, the second part is actually more important and that’s putting your money to work. Retirement isn’t a function of age, it’s a function of how well you put your money to work.
There are three main parts of putting your money to work. First is how much money you can save each month, the second is how much money is in your retirement account and the third is the annual percentage gain you are able to achieve.
Most people focus on the first two parts (savings and total account size). Focusing only on these two parts cause most people to feel severe financial fear throughout their lives. They know they aren’t saving enough (because few can save their way to retirement) and they know they don’t have enough in their accounts to retire comfortably…or even to retire at all.
The reality is while the first two parts are important, they almost don’t matter. Given enough time, even a small amount of money (like saving $100 a month) can become millions of dollars if the money is put to work hard enough because of compounding. If your system and your probability profile suggest a 50% annual rate of return, stay centered and focused on this return and not on how much you have in your accounts or how much you can save. Trust that your account will grow to an acceptable size over time as long as you continue matching or even beating your expected annual rate of return.
Singleminded focus on the annual percentage gain smooths out the emotional responses to individual positions which tend to trip up new market participants. And one of the biggest ways people trip up is to change their strategy mid-stream.
If you enter a trade with one set of rules…please exit that trade by applying the same set of rules. Don’t let losses affect when you get out…follow the rules for getting out. Don’t let the losses of one trade (especially losses that came by following the rules) cause you to change your approach on future trades. Stay with the position according to your rules and forget about it when you take the next one. What you want is a dependable, repeatable way to profit in the markets. A consistent approach is the only way to consistent profits. Otherwise you become a gambler.
Such emotional reactions (and desires to change your system midstream) can subtly alter your expectations for future trades. When necessary, step back from your positions and review your system’s expected win/loss rate. Review your trades to see if you have been following your system both for the entries and for the exits. If you see discrepancies, swing back to center and refocus on the basics. And reset your expectations as needed to keep centered and successful.
Putting your money to work in the markets is a journey not a destination. Expect that your financial future will only improve through a series of trades made over a lifetime and not on one (or even a few) massive returns. Keeping your eye on the annual percentage gain and not on your monthly saving rate, your total account size, or the outcome of any individual trade will help you avoid the mistakes caused by inappropriate expectations or unhelpful emotions.
Making the transition to real money can be very emotional and scary. We spend our lives investing in our ability to make money and making the necessary sacrifices required to make more money. This is the first part of the wealth creation cycle. Our ability to make money. We know we need to save money but life seems to get in the way. However hard we work, we struggle to get ahead and really prepare for retirement. The hard truth is that few of us will ever earn enough to be able to save our way to retirement.
To really be able to retire comfortably requires an effort on the other side of the wealth cycle: Putting our money to work. This is investing or trading. Too many of us have depended on our brokers or financial planners to help us invest and have little or nothing to show for it. They won’t do the job as well as you can because you care more than they do. You also have built in advantages in the markets once you’ve made the shift to doing this for yourself.
We encourage you to practice until you feel comfortable with the mechanics of all parts of the process and then to push yourself to trade real money quickly. It will feel uncomfortable initially. So start small until you feel comfortable again. Then increase your risk size or frequency (or both) to really start putting your money to work.
It’s possible to catch up a lagging retirement far more quickly than you ever thought possible but it does require you to become the kind of person who can make a plan, consistently implement the plan, and be aware enough of your results to improve that plan over time. Stay focused on your plan and don’t allow the natural emotional responses you’ll have as you watch your account value move up and down to stop your progress.
You can do this. It might not feel easy but what good things in life are easy at first? Don’t let that initial resistance or fear stop you before you even start. And don’t put yourself in a position where a losing streak will force you out of the markets or ruin your trading account.
Stay focused and careful and you will eventually be able to put your money to work at higher rates of return confidently and consistently. Your financial future is in your hands. You’ve spent a lifetime getting better at making money. Now it’s time to get better at making that money work harder. As you do, you create your own retirement lifestyle and live life on your own terms. Go do it!