Changing your trading blueprint (habits) is hard. For example, last night I was talking with one of my traders and the question came up as to why new traders feel the need to trade, trade, trade. The answer is rather simple. When they decided to become a trader, their mental image (or blueprint) dictated they would do exactly that, trade, trade, trade. (Typically this visual image is very reminiscent of the exchange traders, a very aggressive style of trading.) After all, that is what a professional trader is suppose to do — TRADE.
Changing Your Trading Blueprint
Typically, the true professional trader is employed by a firm or owns the firm. They are expected to trade all day to generate gains for their clients. For example, I have a client in the UK that has 8 professional traders that work for him. They trade other people’s money and lots of it. I have another client that runs his own hedge fund. Their job is to trade all day and they have high probability setups on very short timeframes that make money consistently over time. They are not trading with “scared money” and they are not trading with a $25,000 account (or $5,000). They are trading with millions of dollars so when they have these little insignificant losses, it rolls right off and they are on to the next trade. Most of these traders will receive their paycheck at the end of the week, regardless of whether they made profits in the account or not. They do have loss limits in place that prevent them from losing over a predetermined percentage of the account assigned to them.
Now, let’s look at what I call a personal trader. A personal trader typically only trades his own account and, when compared to these professional traders, it is minimal. Maybe the personal trader is retired or was laid off. He does not have the financial means to sustain the drawdowns from trading all day everyday. Instead, the personal trader must be more selective in their trades to minimize their drawdowns. They need to be more careful and trade with higher timeframes that show where price is going. They must minimize their losses or they risk blowing their account, which in comparison to these professional accounts, is small. Plus, any losses they do incur wrecks havoc on their trading outlook and changing their trading blueprint will be difficult.
This is where changing our trading blueprint in order to survive makes a difference. I am realistic — I don’t have an unlimited amount of money to throw into the market. I have several very modest accounts that I trade to generate profits to pay bills. I know that I could wipe out any one of these accounts by losing control and misleading myself into thinking I am a professional with unlimited resources. Instead, I admit that I have limited resources and, therefore, must take care when I choose to enter a trade. At the end of the week or month, if I have not made money, then I don’t get a paycheck. Therefore, my blueprint of what I am doing is one that shows I am patient, I follow my specified ruleset, and I don’t expect to trade, trade, trade. Instead, I only expect to trade maybe 2 or 3 days a week. (This mental image is one that is calm, focused, and ready for an opportunity, if the opportunity presents itself.)
Many of you may know of the great Jesse Livermore. A trader from the early 1900s. He began as an office boy and progressed to trading. He had relatively small capital and turned it into millions. Then he lost it. Then he did it again. Then he lost it again. Whenever he had small amounts to trade with, he knew that changing his trading behaviors (limit risk) would allow him to increase profits.
Eventually, he committed suicide but what caused his success and his failures. When he had a very small amount of capital, he took care in his trades and only traded his plan (changing your trading blueprint for the better). Then when he had millions, he threw caution to the wind, ignored his trading plan, and lost it all (again changing your trading blueprint for the worse). Then he would start small again. Traded his plan. Built his account up, again. And, again, threw caution to the wind. This continued until his suicide in 1940. Was he a great trader? Absolutely, as long as he treated his account with caution and traded his plan. The moment he threw caution to the wind, he lost.
Why would he throw caution to the wind? I think it is because when he had millions he considered himself a professional trader who had unlimited capital and, therefore, could risk greater amounts. Since he had unlimited cash resources then he had no need for a plan because he had plenty of money to throw around. However, when he had smaller amounts, he saw himself as a personal trader, and was more cautious over which trades he was willing to enter (followed his trading plan).