Guest contribution by Alex Docharty who gives his insight into the psychological barriers involved with spread betting -:
Chances are you’re feeling gutted, sick, angry with yourself, frustrated. You’re not sure whether to quit this thing for good or to go back in to win it all back.
STOP. Now is not the time to trade. It is, however, the time to take stock, to learn from what’s happened and to come up with a plan.
It’s probably little comfort, but every successful trader goes through this. The question is whether you can learn from this, or whether you’ll let it happen again.
What happened?
Let me guess. You had a lucky win at some point recently. You thought ‘this is easy’, so you upped the amount you were trading. You quite possibly justified this by telling yourself that you were only risking profit, so the worst that could happen was you’d break even if you lost.
And let me guess what happened next. Your bet lost, but rather than stopping, you felt the urge to win it back. You didn’t like that losing feeling, and you wanted the winning one back again. At this point, you probably lost again. In desperation, you upped your bet to try to get back to where you were, only to lose again and find that you were even further away from the place you wanted to be. And so on, and before you knew it you were thinking ‘sod it I’m going to risk everything to try to win this back’ which is how you got to where you are now. You now wish you could turn back time, wish you’d stopped when you were up, wish you’d been sensible and followed those rules you’d written for yourself. You probably feel sick to the stomach, thinking about how long it’s taken to earn the money you’ve just lost. You’re also probably now torn between two competing urges the first, to win back what you just lost, and the second, to never allow what’s just happened to happen again. Unfortunately, the two are incompatible.
What to do now
First off, accept that that money is lost. Forget trying to win it back. It’s gone.
Secondly, accept that everything that has happened up till now is behind you. You are where you are and you can’t change it. Things are different now to how they were before. It’s time to dust yourself down, take the time to digest the painful lesson you’ve just learned, and accept that you’re right back at the start again. There are no two ways about it. The way you approached trading before didn’t work. You may have less money now, but you’ve just reminded yourself of the number one rule in trading – LIMIT YOUR RISK.
And, if you haven’t already realised it, you’re going to have to realise this now. If you’re going to limit your risk and do this properly, you will also inevitably have to limit your profits. I.e. face the facts – this is not a way to get rich overnight. Look what happens when you try to do that. Done in a disciplined manner, this can be a way to get rich, but you have to accept that it’s a long term project you’re in. Every day you’re looking to add another brick they can and will add up to create a palace, but you have to concentrate on the bricks. Build a wall at a time, and see what happens.
How to go forward?
You need to prove to yourself that you can control your emotions and be disciplined in your trading.
What I would advise is this. Spend the next two months simply trying to trade in a disciplined way coming up with a plan and trading that plan.
Only trade with a small amount. (I know what you’re thinking ‘If I only trade with a small amount I’m not going to win anything’. Ask yourself this judging by your past performance, do you honestly think you would come out of the next couple of months with a profit? Or is it more likely that you’d blow your account again?) Imagine that your aim is simply to break even just think what an achievement that would be. Well, if you’re aiming to break even then it shouldn’t make any difference how much you’re trading with. Break even is break even, whether you have hundreds or millions in your account.
If you manage the next couple of months sticking to the rules (ie, only ever risking 2% of capital on a trade), then reward yourself by inserting a small amount of capital into your account at the start of the third month. If you manage to do this again in the third month, then again insert a small amount of capital on the fourth month, and so on. The idea is to slowly increase the amount you’re trading, but all the time keeping on top of how much you’re risking. What you’ve probably already discovered is that you trade much better when you’re not trading with ‘scared money’ it’s that much easier to let your profits run, and to not stop them out too early.
This has been a painful experience but it’s a necessary one. It happens sooner or later to everyone on their path to success. Why do you think only 5% ever make it? Because most give up.
Learn from it and do not let it happen again. There is a reason why every successful trader will tell you to limit your risk to a maximum of 2% of your account. And it’s just hit you at a hundred miles an hour, leaving you winded and dazed. It can and it will happen again if you get complacent. Remember this feeling, and let it be the catalyst for change.
