This step in the 12-steps to good trading will be the most challenging and will take the longest for most people to overcome. It will require the most maintenance over the life of your trading career and it will also be nearly impossible to learn from a short article like this but hopefully I can get you on the right track and help identify some resources and exercises to help.
Ego is really a tough thing for me to write about. I don't fully understand it and apart from my Christian viewpoint it wouldn't make any sense at all to me. Ego is that part of you that you refer to when you say "I." Its part of your soul as opposed to your spirit. Both reside in your body. Its everything you think you are. Your self-concept. It says "I am hungry...I am a winner...I am a loser...I am a Californian...I am a Republican...I am nice...I am clever...I don't believe that...I believe that more than anything...blah blah blah.." It's the inner part of you that is most influenced by the outside world and I believe outside forces as well but I wont get into that unless you ask.
Ego is the part of you that has been shaped over the years or the last five minutes along with your concepts of who you are and how you see yourself in the future. It is the part of you that you display and defend and its also the part of you that keeps you from living in the very now moment.
In step one of this series I emphasized how there are no destructive trading emotions in the very now moment. In the now moment fear cant reside because it is based on images of the future and past. Greed cant reside there either. Well, the thing that blocks easy access to that place is the ego. It always wants center stage. In trading rooms and in sports and everywhere in performance based art, the ego stands out. In trading rooms it presents itself in bottom and top pickers and calling trades from the past and announcing one-sided results. Said plainly, it usually shows up as boasting. The trader who boasts not only doesn't likely think he or she has an ego issue, but they certainly don't recognize that they are led by it. The danger to them in these cases is that they are not market focused but are running their trading business from the part of the self that is most subject to the winds of the world and are linked arm and arm with the most destructive trading emotions they can face (fear, greed & denial). It effects everything from their risk tolerance to their confidence which are the other two pieces of this enchilada so I will move on and tie them together and help you develop a plan to make sure your ego is in check.
The number one issue I see people have when working with them on their trading is not accepting risk. Its normal for us to want to avoid risk and that shows up as the normal thing to do when we come to trade. The trouble is that being normal in trading is being a losing trader and washing out.
Never makes it in trading. We have to be abnormal and take risks. Calculated risks of course and that is where having a system or method comes into play but it goes beyond that. Lets just assume you will have a method of approaching the market that will put the odds in your favor and that you will work at it and know how to use it. We also have to have very clear and realistic concepts about what trading is and align our expectations with reality. It is not something you can realistically try and squeeze in to your summer vacation and learn in a few weeks so you don't have to go back to work. Some of you are saying "yeah, of course not. Who would think that." Well unfortunately, and also understandably so, as the marketing in the trading education space paints a really rosy picture and more people think that way than you could imagine. Plan on a long learning curve and doing a lot of hard work. Plan on training your focus on learning to trade and not on money or exotic calculations of what-ifs as far as how much you could earn in a year or whatever "normally" comes to your mind. Prepare to be abnormal. We don't think about money much outside the development of our trading plan. If you do think about money then as quick as you earn it in your head you had better give it away in your head or you will be the one giving it away instead of earning it in reality. Again we think abnormally.
Would you want to go to a heart surgeon and have him chopping into you and at the same time thinking about the boat you are buying him on his lake? Or would you rather him keep his now moment eyes on your aorta? For that matter, would you want that same doctor to have had a speedy summer Internet Heart Surgeon degree program or put his time in learning the hard way (at John's Hopkins no less). I know that's not realistic, or at least I sure hope not, but it's the same idea as someone thinking they can speed through the process of learning to trade. After all, the heart is pretty much going to be in the same place give or take a few inches for all of us but the market can and will change daily or even quicker (yes, it at least follows the same structure most of the time).
What does this have to do with risk-tolerance you ask? Well if you choose to trade I just want to make it clear you are taking a big risk. Most wont make it but if you really get these first few steps down and make building a better you a priority along side your chart studies then you have a great chance. Most wont do that though. You are risking the time and chances to do something else more normal and you have to know that.
Now here is the kicker. Most people wont or cant accept risk because they are under capitalized. They can too clearly see the end of the road. You can learn on as little as you want, but it will effect your thinking. Fear and greed will get all over your face or try to anyhow and your ego will get invaded with denial and if you don't take those early steps I have already covered and stay in the now it will be very, very, normal. If however you do train yourself to stay in the now then the capital wont matter as much. I suggest you have at least ten times your margin amount if you want to help quiet fear and greed and be able to accept the risk. Some people need a lot more than that. Whatever amount it would take where you can look at your per-trade maximum loss and think of it about the same as if you misplaced a dollar or bought a raffle ticket from some kid. This is important to understand so if you don't please start a dialogue with me via email so we can go over this more.
Moving on to confidence now, and really each of these could be their own series. I just want you to be introduced to them and make it known that you will have to contend with these things. At the end I will give you some practical ideas for dealing with some of them. Confidence in your trading is important. Both in your system and your ability to operate it. You need confidence that the odds are in your favor if you do what you are supposed to do so that you can accept the risk and put a trade on and let it play out without gripping that poor mouse until it has no life in it. You need this confidence because without it your fear will block you from doing your breathing and getting to the now moment. I hope you can see how these three topics tie together here.
How do we get that confidence? Lots and lots of work. It requires many hours of screen time and replays. Technology now makes it really easy to get the operational side of your system down when there is nothing at risk. That is good even though it doesn't train you much on the more challenging part of trading, which is controlling yourself when it really matters. But replays and simulation are great for just drilling into your head the steps you take when you trade. Its vital that those things are automatic when you do get into live trading. You need the confidence that comes from doing the exact same thing hundreds or thousands of times. This is the same concept that US Marine Corps or other armed forces go through when they drill or train. All of their training is done in conditions that largely not life threatening. I am not sure spy-rigging counts because that just looks downright crazy. But nobody is actually shooting at Marines in training with hostile intent or rather, capability. Those in charge of the training know this and don't belittle it as being "not-real." They make it as real as they can and that's what we need to do in when we simulate trading. When those Marines hit the ground in actual war zones they act automatically. Not because they know the actual beach or woods or desert or towns but because they know how to move together towards an objective as they have done countless times in training.
I grew up around people just like that and have seen the payoffs and that is why it is so important to me to train thoroughly in my trading and also important that you do the same. Confidence comes from that and from the translation of that training into real live success in the markets. Plan on being abnormal here as well. Most wont do this.
Ok, now to the battle. The best way to keep your ego in check is to keep quiet until you do have it in check. Its not about you. Concentrate on becoming a listener. The next time you are in a conversation with your wife or husband or whoever, try and just listen. If you are jumping out of you skin because you need to talk then this is an area of struggle for you. If you don't even catch it until later that you went on and on about " I, I, I, me, me, me" then it is a dominant area in your life that needs to be addressed before successful trading will occur. Part of what the ego does is express emotions in packages. If you focus on the breathing and self-awareness techniques of steps 1 & 2 you will get better at getting in the now moment. The thing that deflates the destructiveness of all emotions and the ego is identifying the emotion from the now moment and calling it by its name. So if you feel fear or you feel the ego rising in your own unique pattern then what you do is say it. Say "fear, I see you and you have no power over me." If you are Christian, and I pray that you are, then really let the emotions have it in the name of Jesus. When you operate in the now moment and identify your feelings like that it deflates them. In other words it keeps you in self-control and in the moment and not subject to them. This like anything is a learned skill and will require you to be a good listener to not only others but yourself and what is coming up from inside you. The great thing is that while it deflates negative emotions, staying in control and recognizing positive emotions perpetuates the benefits. Understand me clearly here. I am not talking about visualizing the outcomes of fearful things. I don't want you to mediate on the negative stuff. Just call it by its name and tell it to leave because it has no authority over you. If you make this a habit your life will change like you cant imagine.
Now as far as risk-tolerance goes, you have to raise capital and stay in the now moment along the way. The less money you have the less you can do. Trading something like FOREX at Oanda is probably the best option for you if you are starting with very limited funds because you can trade fractional pips and stay in the game on little for a long time while you learn, but at some point you will have to add capital. Do not set yourself up thinking you will trade your way from $1,000 to millions. If you don't treat your opponents and your business with the proper respect it just wont likely happen for you. You may have a good hobby and learn a lot and that may be great in itself, but until you treat your trading as a start-up business with real capital needs it wont likely prosper. I pray that some of you prove me wrong, and I have seen it done, but they were really abnormal. If you try and do the same I would be as abnormal as you can in the places you can afford to in order to compensate for the very normal idea of starting with nothing or close to it.
Lastly, for confidence, plan on working and building a life of balanced confidence and keeping confidence in check and based on real training. If you find yourself down the road trading and needing layers and layers of confirmation before you take a trade then you drifted away from confidence to some blend of being unconfident and being overconfident. Being unconfident in your system and over confident in your ability to handle it on your own. Needing excess confirmation is like a farmer who says he will plant corn seed just as soon as he sees some tassels. It just wont work that way. He has to plan his crop (develop a business plan), buy his seed (raise his capital), plant it (release some capital), and then let the earth do its thing in its due course so he can harvest (evaluate the results and learn from them). Try and blend some of your personal traits that are strong outside of trading with your trading. If you are a mother or father and somehow are very patient with our kids then have confidence that you can use those same abilities in the market if you stay in the now. If you think about it, that is exactly what you do with your kids if you are one of those people. They make a big mess or if older kids, wreck the car or whatever, and you take a deep breath and just release in an instant all those destructive emotions so that we don't kill them. The same thing we do when we prepare to trade.
Anyhow, I covered a lot. Probably too much for one article but a couple of you probably made it this far. If we end up working together or if we already are then chances are we are already deeper into some of these areas and techniques. We will get to some chart stuff in the next article. Spend the majority of your time in these first three steps though and pick my brain or do whatever it is you need to do to get yourself in a position where you can operate from self-control rather then being dragged through life. There is so much more to say on these mental topics and more so I will write more later. Thanks for listening.
God Bless ~
Ryan