Some time ago, a fellow trader called me, let's call him Tom and he traded occasionally and was the president of a small company during the day. We arranged to meet and it seemed like a friendly conversation and there was no indication of what I was about to hear...
“You know, I actually have one more thing on my mind” - Tom said haltingly. “Last week I lost over half a million on the market.” I'll admit I was surprised as I knew he made money in the market, but I didn't think he traded that much. Losing such an amount for an occasional trader is no small thing. So, before talking with him, I recollected over 20 ways of dealing with losses which were acquired from various sources, including a group of the best traders in the world whom I had interviewed in the past.
I was anxiously awaiting the meeting as I had previously met with traders before with large losses but nothing like this situation. A loss of this magnitude and especially in such a short time frame of just 9 hours, can seriously affect the psyche. I have witnessed situations where people were on the verge of suicide and others who were not able to go back to the market for months. Other traders with large losses were haunted by remorse which lasted for years which shows that this is often as serious as it can get.
At the meeting, Tom told me what happened... For several months he had been observing a prominent trader who was able to grow his account by a factor of 10 in a single month. At some point he decided that it wasn't that hard to duplicate the success and deposited around $30k into an account and traded for a month. His initial success saw him take over $670K out of the market by trading 19 positions. The previus night he decided he was going to try to make it $2M and was hoping that there would be a move that would allow that to happen.
He sat down at around 2am and opened 3 positions with each having several dozen lots. A few minutes before 11am the next day they were all automatically closed at a loss and the account was wiped out. Later he told me that these positions were outside the trading system he was supposedly using.
To my surprise, Tom did not seem at all concerned about the loss! I questioned him at length about the incident, looking for any signs of trauma or any remnants of a difficult experience and I found nothing. There wasn't even a dip in his mood and as usual, he was in a good mood which to me was very strange. Intrigued, I began to inquire as to why he was unconcerned about such a loss as I was sure that it must have mattered to him. It was true that he was the president of the company but he didn't make that much money that he was able to blow through $700,000 in one evening.
Tom answer gave me food for thought for a long time and that I want to share with you:
“This is virtual money.” As long as you don't withdraw it, anything can happen to it. It's a virtual entity and it can disappear as quickly as it appeared. It's only when you have it in your bank account that it becomes real, but until you do, it's just a row of numbers. That's how I've always approached the markets, it's just numbers and nothing concrete. This again surprised me as it is the first time I had encountered this approach as in all other cases of traders I had so far worked with, money always mattered.
The depth of what Tom told me then didn't come to me until a few months later and in a nutshell, I can describe it this way:
Each of us has some image of the importance of money in our lives and we bring that image to the marketplace. A big loss (as well as a big gain, I've had that happen) can throw a person off balance for days, years or indefinitely. The essence of the problem is that the loss causes pain and this can be almost physical and can last for weeks or even months. There are traders who go through months of hell because of losses and on top of that there are additional serious and other unpleasant issues such as judgment from the environment and family.
I knew that the best traders are very tough and mentally resilient and this is one of the secrets to longevity in the market and the huge fortunes they build. Mental toughness is something I have studied for many years, in the case of top traders it is outstanding. Here I have come to understand that mental toughness has many forms and the lack of response to very difficult experiences may be due to a different perception of the situation, a different value system or a different value scale.
I must admit that Tom is certainly mentally very tough. This is an example of how different traders approach markets and money differently. The way you think about money determines how your psyche reacts to profits and losses and thus the mental strain. As long as Tom treats trading as a numbers game, he will be confident of the outcome and neither profit nor loss will shake him.
I am looking forward to discussing more about this in other articles because mental toughness is a little known topic and yet it is one of the pillars of success not only in trading, but... life in general. I will also tell you about a certain system (actually it is not so much a system as a way of trading) that was popularized by a trader who systematically made results similar to the one described in Tom's story. I will also let you know more about this trader and the system Tom followed who is very popular which many newspapers have featured because of results he was able to achieve.
Dariusz Swierk can be contacted at New City Trader
