If you want to win at trading, you can’t be afraid to lose.
And trading with scared money – that which you cannot afford to lose – is a surefire way to fail at this endeavor. Attempting to justify the use of rent money, your grocery budget or any funds needed to pay for living expenses as risk capital is a huge mistake.
Despite this truth, many Forex traders still attempt to do so every day. And the advent of brokers accepting debit and credit cards for deposits has further blurred the line between living costs and risk capital.
Although these brokers advertise this service as a benefit, I assure you that the only benefit is to their bottom line in most cases.
What doesn’t get publicized are the emotional side effects that crop up as a result of using indispensable income to trade the Forex market. In fact, those who do this have severed their chances of succeeding before they’ve even begun.
In this article, we’re going to take a cold hard look at four common mistakes that arise when trading with scared money. I will also introduce an apparent, yet often overlooked solution to mitigate these errors.
Let’s get going!
There’s a reason I only take a handful of trades each month. It’s because exceptional opportunities don’t come around all that often.
Aside from that, I also know that it only takes one good trade each month to make a steady return on my money.
But here’s the deal…
There’s one thing in particular that allows me to spot those opportunities and that is the risk capital in my account.
In case you’re wondering, risk capital refers to any funds used for speculative activity. More to the point of this article, it’s money you can afford to lose.
By only trading with risk capital, I’m able to maintain a neutral mindset while scanning my charts. If I couldn’t afford to lose that money, I’d have emotional strings pulling at my every decision which would adversely affect my ability to spot favorable opportunities.
For example, if I were to risk $1,000 on a EURUSD short position that meets all my criteria, I know there’s a chance of a total loss. But that’s okay because I’ve fully accepted the risk. I also know that if I lose the entire sum, it won’t impact my living situation.
Furthermore, I am aware that the $1,000 is serving its purpose. I’m not worried about losing it because I’m giving it the job I intended for it.
At the end of the day, finding the most profitable trade setups takes a neutral state of mind. And you can’t have that if you’re afraid of losing the funds that get allocated to a single position.
The very best way to reduce the fear of losing is to trade with money you can afford to lose. It’s a simple and even obvious notion, yet I hear from several traders each month who have had to alter their living arrangements due to a few bad trades.
If you want to spot the most profitable opportunities (who doesn’t?), you have to remove the emotional strings you’ve tied to your trading funds.
Having confidence as a trader is paramount. And while it does take time to build the confidence necessary to succeed, trading with money you can’t afford to lose will prevent you from finding it.
Not only will it cause you to second-guess favorable trade setups, but you will also begin to doubt the placement of your orders.
All of a sudden, a profit target at 200 pips that you were so confident about becomes 100 pips. Likewise, the stop loss that was 50 pips away is now 100 pips away.
The fear of losing money has you second-guessing your every move.
Your confidence begins to fade as you become more concerned about losing next month’s rent than you are about the technicals on your chart.
This brings me to a common misconception about trading.
It is true that your number one job as a trader is to protect the capital in your account. But that doesn’t involve being afraid of losing money on any given trade.
Don’t focus on making money, focus on protecting what you have.
Paul Tudor Jones
I bring this up because as humans, we’re exposed to overstimulation every single day. With a million things happening in our lives, it’s all too easy to become blind to the signals our bodies are so apt at producing.
If you experience immense fear each time you put money at risk in the market, that’s your body trying to tell you that something is wrong.
You’d be wise to listen and take action where necessary.
To succeed at trading Forex, you have to disassociate yourself with the money to some degree. Because if you’re emotionally attached to it, you’ll be prone to second-guessing yourself as soon as it’s time to put money on the line.
Cutting Winning Trades Short
The idea of letting your winners run has been made cliche over the decades, mostly due to the old adage to cut your losses short and let your winners run.
Having traded since 2002, I can tell you that letting your winning trades run is an indisputable key to success.
As the great George Soros famously said:
It’s not whether you’re right or wrong that’s important, it’s how much money you make when you’re right and how much you lose when you’re wrong.
In fact, the real key to success is pyramiding, but you can’t do that without letting your winners run.
The problem traders face when using scared money to trade is that they begin to see a profit as a profit rather than allowing the market to dictate what a position is worth.
This oversight is hugely disruptive when attempting to build a trading account.
Instead of analyzing a market environment from a neutral standpoint so as to maximize gains, they begin making decisions about open positions based on the fear of losing potential profits.
Of course, those who have read my previous posts know that unrealized profits belong to the market.
This fear-based decision making inevitably leads to cutting winners short. And in doing so, the trader has unknowingly stacked the odds against him.
As soon as you begin cutting your winning trades short, you also shorten the distance between the risk and potential reward. All of a sudden the 3R trade idea is now only worth 1R.
There will, of course, be times when the market decides that a position is worth less than what you had intended. And that’s okay. In fact, that’s how to become a consistently profitable Forex trader – by allowing the market to ebb and flow naturally around your position.
But if you’re trading with scared money you won’t have that luxury. Instead, you’ll be influenced by the risk of losing your much-needed capital rather than sitting back and allowing the market to do the heavy lifting.
The beauty of employing a favorable risk to reward ratio is that you can ignore your win rate and still make consistent gains. I know because this is what I’ve done since 2010.
The problem with cutting your winners short is that you force yourself into a situation that requires a high win rate to turn a consistent profit.
In essence, you’ve stacked the odds against yourself.
Letting Losing Trades Run
When it comes to trading, the word “hope” is a four-letter-word. Said differently, it’s a bad word and one that has no place in the markets.
As soon as you begin hoping for a particular outcome, you open the door for unwanted emotions to creep in such as fear and greed.
To relate this concept to sports, you can’t watch your favorite sports team and hope that they win and not be disappointed when they lose.
Unfortunately for those trading with scared money, the idea of hoping for an idea to work out is commonplace and ultimately leads to letting losers run.
Instead of cutting losses short at the first sign of invalidation, the trader holds the position with the hope that the market will soon reverse course and move in their intended direction.
By the time the pain reaches critical mass and losses get cut, the damage has already been done. And as I’ve pointed out in the past, it takes a 40% gain to recoup a 20% loss.
But here’s the real issue…
The same undisciplined trader who holds positions too long will inevitably attempt revenge trades to recoup recent losses. This vicious cycle will continue until the account blows up or the individual gives up, or both.
If this sounds familiar, you aren’t alone. I get the unfortunate emails from traders every week who say they can’t join my site because they’ve blown their trading account.
Heck, at one time I was guilty of making the same mistakes I’m preaching about now. When I started trading in 2002, I was fresh out of high school.
Do you think I had tons of disposable income?
Not a chance.
I traded every penny that came in, regardless of what I needed it to pay for.
But you know what?
Each of those early accounts ended with a bang, and not the good kind.
The bottom line is that if you want to have the ability to cut losses short and let profits run, you cannot afford to trade with money you need to pay for living expenses.
So how do you reduce the chance of falling victim to these pitfalls?
At the risk of sounding redundant, the best way to avoid these errors is to trade with money you can afford to lose.
That’s it! There is no other way.
If you need the money in your trading account to pay bills, buy food or cover any other living expenses, you’re probably better off cashing out and waiting to trade at another time.
Or better yet, move back to a demo account while you save up so that you aren’t missing out on screen time.
Even the most skilled trader in the world would struggle without the peace of mind that risk capital can offer. So do yourself a favor and make sure that you don’t need the funds in your account to pay for life’s expenses.
You’ll be amazed at how effortless trading becomes once you can let go of the emotional attachments that stem from the fear of losing.
One of the tenets of successful trading in any market is to only use funds you can afford to lose. This is why we refer to trading capital as “risk” capital.
It’s because that money is at risk every time you put on a trade. Not only that, but the mere act of being involved in a zero-sum game such as trading means that your entire trading account is at risk.
So if you need the funds in your brokerage account for next month’s rent or tomorrow’s dinner, you may want to reconsider your priorities.
Sure, your intentions may be just in attempting to create a better life for yourself and perhaps your family, but trading with scared money won’t get you there.
The market isn’t going anywhere. If you aren’t financially stable enough to risk money in the markets right now, that’s perfectly okay. Take some time off and come back when you’ve got some cash you can afford to lose.
Only then will you be able to trade with the clear conscience needed to profit consistently.
Are you guilty of trading with scared money?
Leave your comment or question below and I’ll be sure to respond.