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.
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
guidance call last week? He was
SPDR S&P 500
Power Shares QQQ Trust
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.
Toward the end, he learned his lesson. He started taking small, focused steps, trading low-risk stocks and making some headway. He started comparing his results with his own track record and judging his success by the progress he was making, rather than comparing himself against the progress others were making. But by the time he got in the right track, his portfolio was already so low he that could not realistically continue. So last week he quit.
Our second tale is the story of my friend Ron. (Names have been changed to protect the innocent from public humiliation, so I can safely show my face on the golf course.) Ron is a lot smarter than I am, I freely admit. So after he asked to see my trading records and did a study of how much money I was making, including stops and overhead, he was contemplating quitting his job and going into trading, because, after all, if Ken is making that much, he could do a lot better, because he is smarter.
So Ron took out all his savings, opened a trading account and took some time off from work. I began teaching him what I do, warning him to start slow and safe. He was very methodical, meticulous and hardworking, and he began doing quite well. After about a month, he started moving into faster and faster trades, against my advice. He started comparing his trading not so much with my trading but with the possibilities out there. And we all know that each and every day there are hundreds of trading opportunities, so we are constantly pressured by regret.
After a few months, he was doing very well. He was excited, and had some very nice profits built up. One day he was at home trading, and I was talking to him on the phone, comparing notes. He told me he was going to trade a volatile stock that had news. I said, "Wow, it can certainly go up $10, but it's going to be fast. I am going to stay away." He kind of chuckled with that "yeah, but I am smarter than you are" undertone, and went long.
The stock went up at first but then came down hard, and he missed his stop. I have been seeing a lot of people falling into the same trap lately, trading things like
He just sat there in shock, allowing a big loss, and wound up selling at the bottom. It shocked him so much that he could lose so much so fast that it ended his career. And the funny thing is, he didn't lose a dime of his original investment. He was actually still in positive territory, with some nice trading profits. But that one loss shook him so badly that he quit trading. You don't have to necessarily lose money to end your career. Sometimes a loss of confidence is enough.
The moral of these tales is "Stop comparing." Stop focusing on what other people are doing, and focus more on what you are doing. Stop focusing on what is eventually possible, and focus on what is realistically possible for you now. An objective look at your own situation, skill level, goals and learning process can provide all the guidance you need to move forward and find your own trading success.
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Ken Wolff is founder of MTrader.com, the first educational daytrading site on the Net, and co-founder of InvestingOnMomentum.com, a Web site devoted to short-term potential for retirement accounts. TheStreet.com has no affiliation with InvestingOnMomentum.com, and no endorsement of InvestingOnMomentum.com or momentum trading is intended. While Wolff cannot provide investment advice or recommendations here, he appreciates your feedback; click here to send him an email.