When Trading, Your Only Comparison Is With Yourself

This column was originally published on RealMoney on Feb. 19, 2008 at 8:29 a.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

Let me tell you the sad tale of two trading careers that have come to an end, and no, I'm not talking about Jerome Kerviel, the rogue trader from Paris. These are men that I know and respect who just couldn't seem to make it. One lost all his money, and one lost all his confidence, but the roots of their problems were the same: making comparisons that drove them to risky trading.

It is human nature to compare ourselves and our accomplishments with those of others. In some ways this can be good, because we learn by example and strive to improve. But many times when I am watching people trade, I see the comparisons turn ugly, leading to competition, envy and discouragement. Too often, this leads them into risky trading.

Whale

There is one trader in my chatroom named Whale. He used to trade for Louis Bacon, and he has one of those quick, sharp, witty East Coast personalities. Do you remember the Cisco(CSCO Quote - Cramer on CSCO - Stock Picks) guidance call last week? He was short SPDR S&P 500(SPY Quote - Cramer on SPY - Stock Picks), Power Shares QQQ Trust(QQQQ Quote - Cramer on QQQQ - Stock Picks) and Apple(AAPL Quote - Cramer on AAPL - Stock Picks) off of that call before most of us knew what was going on, and he was out by the time most people had it figured out. So he had one of the best trading days of his career, while others were still sifting through the news. It's dazzling to watch.

The problem is, he makes it look so easy, and for anyone struggling, that can be very frustrating to watch. Too often they try to follow him, with unfortunate results.

One of those followers is the protagonist of our first tale, John. A lot of times, people don't come to me for education at the beginning of their careers. They first try it on their own, and only come to me after heavy losses force them to the conclusion that they may need some education to pull this off. That was the case with John. He started off with a million dollars, and he had been successful in previous careers, so why should trading be any different?

Then he was hit with the realization that successful trading is more dependent on psychological and emotional discipline than on intelligence, skill or method. When I met him, his portfolio had fallen from a million dollars to $100,000.

He has an expensive lifestyle, so he came in not only with previous losses and beaten-down confidence but also with the pressure of needing to make a lot of money to meet his monthly bills. It is almost impossible to learn to trade under those circumstances. It's like expecting to make a good living treating patients after having killed someone with a mis-diagnosis, while you work your way through medical school.

When people comes to me wanting to learn to trade, I recommend that they first sit down and figure out a realistic goal, then create a business plan for how to achieve that goal in the safest and easiest way possible, starting with trades in low-risk stocks they can control. But when a person is under a lot of pressure to make up losses and make a lot of money, they start comparing themselves with people who are making a lot of money, and it distracts them from their own learning process.

In spite of many conversations, with many people urging him to play it safe and learn slowly, John started following the more experienced traders, like Whale, into volatile stocks, and loading up shares. He could read trades OK, and sometimes he would do well. But when a trade went against him, the pressure of needing the money, and the fear of further losses, would cause him to freeze. He would blow his stops and compound his problems even further.

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