Focus on the Trade – Not the Money

We all trade for one reason, right?  To make money.  So why does it seem that achieving that simple goal is so difficult at times?

Also, if we trade to make money, why do many successful trading professionals advise us “not to focus on the money” – doesn’t that seem entirely ironic?

In fact, in my experience, it is true.  In the beginning, I was wide-eyed and money-focused and thought the money would come to me.  After a few successful trades, that belief was reinforced.  It took only two major losing trades to shatter that worldview and force me back to the ‘market classroom’ for a while to learn as much as possible about the trading endeavor – I realized it clearly wasn’t as easy as I had expected or hoped.

One factor that can help smooth the transition from beginner to more experienced trader is the process of learning how to focus on the trade itself, and not what the outcome means to you monetarily.

Yes, one trade can pay your rent for a month; one or two trades can buy you a nice vacation trip or cruise; a few trades might buy a nicer car, etc.  But professionals have said time and time again that if you focus on the money aspect, you’ll lose because you’ll trap yourself in so many psychological and mental games that you’ll do exactly the opposite of what it takes to profit as a trader.

Some examples of such psychological traps:

• Holding on to a loser past your stop-loss level
• Buying a larger position in a stock you love that has declined (aka – doubling down)
• Putting on positions (risk) too large for your account
• Placing stops too tight (with larger positions)
• Exiting your trade early before it hits your stop (panic)
• Exiting your trade early before your profit target (again, panic that it will reverse)
• Exiting your trade before it has enough time to ‘run’ (let your profits run)

I imagine the majority of the points are easy to understand, but the final point may be the most difficult.

Say for example you have a set dollar amount in mind, at which point you will exit a trade (maybe you’re trying to pay rent or some other specific monetary goal).  Now, assume you entered a strong uptrending stock in a great sector early in its potential trend move.  Now assume you capture a $5 move and exit now that you have made $1,000 or more.  You stop trading for the month.

What happens?  Your analysis indicated that there may be a potential for a $10 move but you exited far too soon and you knew it – had you held the position, you could have extracted more profits based on what the market was telling you, not what your pocketbook was dictating.

I’m sure you’ve heard it many times that a handful of trades per year can make up your entire year, especially if your system is a trend following type.  You literally cannot afford to sacrifice short-term profits you’ve made at the expense of  longer term, annual performance measures.

In addition, I’ve had it happen so many times where I was too oriented on the money and purposely placed my stop far too close to market action, only to be nipped out of the position and my stress relieved… just long enough to see the stock reverse and the position carry upwards as anticipated.  Instead of a 5% gain, I experienced a .25% loss.  Quite ridiculous, actually, when you go back and analyze your performance.

Exiting before a stop is hit is actually worse than placing stops too tight.  In the event you place stops too tight, your analysis can show you where you went wrong and how to correct it.  When you exit on a whim or feeling, you can’t analyze the action properly because there are no objective facts or data points (in terms of stop placement).  It hurts to see a position go against you, but exiting before the plan calls for it can result in “the death of a thousand cuts”.

Focus on the trade itself, why you should enter, and where you should exit, and base it on a technical analysis parameter – one of your choosing and understanding.  Follow the position ‘hands off’ until time to exit, or some predetermined condition occurs that prompts exit.  Your mindset when you enter a trade, especially if analysis is done nightly, is often better than when you are in a position and making judgments on the fly.  Honor your analysis and focus on support/resistance, price, volume, etc.

Focusing on the trade, and not the money, will create the objective data necessary for improvement.  Focusing on the money – more than not – will result in losses and disillusionment… which is exactly what you don’t want or expect when you enter a trade.