You're probably a bad trader
200,000 years ago, the first humans walked on Earth.
Life was hard then.
Those that survived their vulnerable infant years grew up to a life of hunting, foraging, and generally trying not to die.
Back in those times, you see, it was surprisingly easy for a caveman to get himself killed. Cut yourself on a rock, and you might die from infection. Get bitten by a snake, and you might not survive the next 48 hours. Sleep in the wrong place, and you might get eaten by a bear...
You get the idea.
Human beings aren't exactly the hardiest of creatures. The rhinoceros has a thick hide. The sparrow can fly away in the presence of danger. Heck, even the slow tortoise can retreat into it's hardy shell.
What about human beings?
For the most part, we're squishy and slow. We also happen to have large heads.
Not exactly prime survival material.
Thus, for most of Mankind's history, we placed a high value on safety and risk-averse behaviour... simply because it helped us to survive.
If you were a reckless caveman, no self-respecting cavegirl would have kids with you because you wouldn't take good care of them.
Heck, if you were a risk-seeking neanderthal, you probably wouldn't live past your teenage years anyway!
This is a roundabout way of saying that risk-seeking humans:
- didn't live long; and
- didn't have many babies
Thus, compared to the rest of the early human population, the risk-seeking cavemen quickly dropped out of the gene pool... resulting in our modern human DNA that seeks security and avoids risk.
And yes, those genes have been passed on to you.
Physical vs Financial Risk
From a physical safety point of view, the tendency to avoid risk is a good thing. After all, there are few situations in which compromising your physical safety is the smart thing to do.
From a financial investment standpoint however, the situation isn't so black and white. There are often times where taking some risk is the smart thing to do.
The thing is... our instinctive brains can't tell the difference between a physical risk and a financial risk. To our subconscious minds, they are the same thing.
This is why so many people are uncomfortable with taking financial risks. Tell them to buy a stock, and they immediately start feeling nervous.
"It's just money"
How many times have you heard someone say, "it's just money"?
Well technically, it is "just money"...
But that's not how the subconscious mind sees it.
When our Apple stocks drop in half, the heart palpitations we experience aren't entirely different than those we'd get from being chased by a tiger. We feel the same emotional shock.
When we suffer a big financial setback, it's not logical to get a knot in our stomach... but we can't help it. It's in our DNA.
This is why, if you're serious about being a trader, you need to understand and mitigate the limitations of your biology.
Unlike a robot that can behave 100% logically, we need to take steps to handle the most potentially harmful aspect of ourselves: our emotions.
Why everyone sucks at trading
Simply put, everyone sucks at trading because we're ineffective at handling our emotions.
As risk-averse creatures, our emotions go into overdrive when we find ourselves in risky situations.
What typically happens then, is that we overreact. Instead of handling the situation calmly and logically, we freak out and make the situation worse.
This is the real reason why so many traders fail. Instead of taking responsibility for our losses, we blame the trading system, the broker, our pet dog.
The thing is, most people greatly underestimate the damage their emotions can do to their trading.
As the trader watches his account equity move up and down with each tick, his emotions follow suit.
Soon enough, greed and fear take over, and he inevitably breaks the trading rules he promised to follow.
It is thus of no surprise that even with a winning system, amateur traders still lose money.
This is why you start with 1 micro lot
Look, there's no point trying to suppress emotions in trading. Unless you're a sociopath, it's near impossible to do.
The next best thing, is to lower the stakes so much that each win or loss feels negligible.
If you're not hurt by a loss, you won't fear it. So, fear disappears.
And would it make a difference to you if you won $1.00 vs $1.20? Probably not. There's no incentive to get greedy because the stakes are too low to make a difference.
Now with fear and greed out of the picture, the only thing left to do is to simply follow your system rules.
It now becomes easy and straight-forward.
As a yet-to-be winning trader, your first order of business is to be consistent with your trading. You get consistent first, then you get the money. Not the other way around.
So for now, just stick to 1 micro lot and notice how your experience of trading changes.
Almost magically, it becomes easy to stick to your trading rules.
And let me know how it goes. I'd love to hear about your experience.
- Chris Lee
P.S. Tomorrow, we'll take a look at "how to win by losing"... so look out for my next email!