Stock Doc: Don't Trade With Your Wallet

Sit on Your Wallet, Count Returns Later

I drilled down with Greg on what thoughts streamed through his mind before he executed a trade. He told me that he had images of his wife being forced to go back to work as a sales representative if he took a huge loss. He imagined his current balance plummeting down into an intolerable negative number. As he recounted this imagery, his face began to flush and sweat trickled down the sides of his forehead.

When faced with the prospect of losing money, Greg's conviction abandoned him, despite the fact that he was missing out on making a large sum of money. This phenomenon is what I like to call "trading with your wallet."

The concept is actually quite simple. If you expect to make money investing in the short term, you had better be ready to back up your strategy with some courage. You should even be prepared for that initial slap in the face. Often you hear the saying "you have to have money to make money." On the surface, there may be some truth to that when it comes to trading. Having a financial cushion allows you to wait out a position longer if it should take a turn for the worse.

Good traders must be willing to risk losing a great deal of money in order to make money. If you cannot or will not make this investment, you will panic, pull out of trades prematurely, and bring home peanuts at the end of your trading day.