It's Just a Business Expense
Stan is still kicking himself for losing $2,000 on a trade last week. As much as he knows he should just let the loss go and move on, he is obsessed with it. He thinks, "It's the holiday season. $2,000 is a lot of money. That's more than I spent on gifts for the holidays. I sure could have used that money to pay off my credit card bills." It is easy to fall into Stan's pattern of thinking. It is natural to equate trading losses with material objects you could have bought with the money you've lost. With every loss may come personal pain: "I lost a month's worth of lobster dinners on that trade, or a trip to Bermuda on that trade." It's understandable, but not very productive. Despite how much you end up losing, it's vital to look at losses coldly as business expenses.
Many people look at money personally and emotionally. They define their self-esteem by how much money they make or how much money they have. Indeed, money has real purchasing power in modern society, so it is natural to view money as emotionally significant and personal. But strong attachments to your money are not very useful when trading the markets. It's necessary to create psychological distance between your trading capital and your self-esteem. Creating psychological distance between you and your money can help you cope with setbacks and losses. How can you view money less emotionally? One method is to have separate mental compartments for your personal assets and your trading capital. In your head, you must think of money in two different and separate ways; it may be appropriate to have emotional ties to the money you use for living expenses, but the money you spend for trading should be treated indifferently as business expenses. In both cases it is necessary to spend your money prudently, but when it comes to business expenses, you must accept the fact that, just as with any business, trading requires money to stay in business. In trading, some business expenses are similar to other businesses. You need money for equipment, data feeds, and commissions. But in contrast to many other businesses, you must include the money you spend on losses in your budget. Losses are merely part of what you need to spend to stay in the trading business. If you trade with reliable, profitable methods, however, you will end up in the black in the long run.
When it comes to trading, an objective approach is useful. There are a few simple things you can do to maintain an objective view. Many say that when money is committed to a trade and the risk and potential loss is experienced, objectivity goes out the window. Thus, anything one can do to minimize the feeling of risk and potential loss will nurture an objective mindset. First, it's helpful to trade with money you can afford to lose. If you can't afford to lose the money you trade, it will be difficult to maintain objectivity. Second, it is crucial to manage your risk. By carefully managing risk on any single trade, you can tell yourself, "I've got little to worry about. I can afford to take the loss." At first you may have to consciously remind yourself of this fact, but over time it will become intuitively obvious. Finally, view profits and loses abstractly. Rather than focusing on concrete dollar amounts, try to focus on percentages, or just amorphous, theoretical numbers. Don't equate dollar amounts with concrete goods and services, such as car payments or utility bills. By maintaining emotional distance with the capital you use to trade, you will be able to trade the markets objectively, rationally and profitably.
Many people look at money personally and emotionally. They define their self-esteem by how much money they make or how much money they have. Indeed, money has real purchasing power in modern society, so it is natural to view money as emotionally significant and personal. But strong attachments to your money are not very useful when trading the markets. It's necessary to create psychological distance between your trading capital and your self-esteem. Creating psychological distance between you and your money can help you cope with setbacks and losses. How can you view money less emotionally? One method is to have separate mental compartments for your personal assets and your trading capital. In your head, you must think of money in two different and separate ways; it may be appropriate to have emotional ties to the money you use for living expenses, but the money you spend for trading should be treated indifferently as business expenses. In both cases it is necessary to spend your money prudently, but when it comes to business expenses, you must accept the fact that, just as with any business, trading requires money to stay in business. In trading, some business expenses are similar to other businesses. You need money for equipment, data feeds, and commissions. But in contrast to many other businesses, you must include the money you spend on losses in your budget. Losses are merely part of what you need to spend to stay in the trading business. If you trade with reliable, profitable methods, however, you will end up in the black in the long run.
When it comes to trading, an objective approach is useful. There are a few simple things you can do to maintain an objective view. Many say that when money is committed to a trade and the risk and potential loss is experienced, objectivity goes out the window. Thus, anything one can do to minimize the feeling of risk and potential loss will nurture an objective mindset. First, it's helpful to trade with money you can afford to lose. If you can't afford to lose the money you trade, it will be difficult to maintain objectivity. Second, it is crucial to manage your risk. By carefully managing risk on any single trade, you can tell yourself, "I've got little to worry about. I can afford to take the loss." At first you may have to consciously remind yourself of this fact, but over time it will become intuitively obvious. Finally, view profits and loses abstractly. Rather than focusing on concrete dollar amounts, try to focus on percentages, or just amorphous, theoretical numbers. Don't equate dollar amounts with concrete goods and services, such as car payments or utility bills. By maintaining emotional distance with the capital you use to trade, you will be able to trade the markets objectively, rationally and profitably.
posted by nomadhunter at 5:01 PM
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