Your Equity Threshold and the Psychology of Money
A Brief Story
We had this one trader (we’ll call him James) at the broker who had been trading a small mini account (about $3,000) for several years. James could consistently bring it to about $10,000 in a matter of months. As he got to $10,000, James would then take $7,000 out and start all over again, only to do it again and again.
Eventually we all noticed James’s ability to do this. Some of the people on the prop trading desk checked out the trading record, and it all held up; a good equity curve, good R:R (Risk to Reward Ratios), consistently accurate, low drawdowns…all the major ingredients of a good trader.
Armed with this knowledge, the company gave him a proprietary account to trade and started with $100,000.
James began to lose and lose badly. He lost 2 out of every 3 trades, could not repeat any of his previous success and was making mistake after mistake after mistake, not being disciplined, not following his trading plan, or risk management rules, or anything.
Everyone began to wonder, ‘is it the market…is it James’s system that’s not for this environment…was it because it was someone else’s account?‘ All kinds of questions came about but they all missed one crucial thing…he had gone beyond his equity threshold.
What is an Equity Threshold?
James had been used to making X amount of dollars for a long time in his job and in the market. It was where his psychology was comfortable with in terms of the amounts he was dealing with. When James was trading a $3,000 account, his largest risk was around $500. When he was trading an account this large and dealing with a risk of $500, losing $500 was not that big a deal to him and something he could tolerate. Because he made X amount of dollars every month, losing $500 did not really push his psychological buttons around money, so they never affected his judgment in trading.
But, when he was trading a $100,000 account, the average size of his risk was about $3,000. This was 6x larger than what he was used to and his mind could not handle it. He wasn’t used to losing $3,000 in a trade before as that was the entire size of his account. Thus, when the trade started to go against him $1,000 or more, it hit all his hot buttons around money, and in came like the Niagara falls, a flood of emotions which totally affected his judgment. As the emotions took over, reason and rationality left, along with good decision making and good trading.
It simply was more money than he was used to dealing with and his mind had gone past James’ equity threshold.
Whether you realize it or not, everyone has an equity threshold. For some people it’s more, others less. It is most likely linked to a) your current financial situation and more importantly b) your psychological beliefs about money.
I always find it amazing how much time people spend on systems, finding the holy grail, looking for some DaVinci Code system – basically spend all their time with a one-dimensional approach to the trading process. What they often fail to find is the real enemy in trading (no, it is not the markets, or the market makers, or anything outside of you), but YOU! Trading is a human endeavor against your emotions, psychology of money, and the reptilian part of your brain which undermines the path to successful trading.
Do you really think your mind is so well trained, that when trading, you can not think about how much money you could make, how many bills you have to pay, what kinds of things you’d like to buy, vacations you want to go on, cars you’d purchase, how little you have, or any of your current issues around money, that they would not be having an effect on your trading and decision making?
What most who embark on the path to become a successful trader have never realized, is the greatest obstacle in trading is you and your own mind. Ask yourself if any of these scenarios sound familiar;
1) Have you ever overtraded and not followed your trading plan?
2) Had a long series of wins only to be undermined by one large loss (or a few large ones) and lose all your gains?
3) Ever felt over confident in your abilities to trade only to find the next series of trades were big losers?
4) Have you ever said to yourself, ‘I just can’t seem to make a winning trade’? and ‘Everything I do goes the wrong way’?
5) ‘I could make money on the demo account but all of a sudden cannot make money on a live account?’
6) Or said to yourself ‘All I need is a good high-accuracy system and i’ll be successful’?
Any of these sound familiar?
If so, don’t worry, your not alone and likely 9 out of every 10 traders has gone through this. The thing is, what is the one common denominator in all these situations? YOU AND YOUR MIND!
Yep, that is right…in all of them, both you and your mind were the common denominators, nothing else.
It is more likely your mind and psychological beliefs around money have more to do with failure (or success) than any other ingredient. Not your system, not the market, but your mind.
Yes, your system does matter, no doubt about it, but your mind, emotions, psychology and beliefs around money can hinder you more than anything else. It was nothing else but this which tripped James up. He had for over three years repeated his success with a $3,000 account, yet could not execute his system with the same discipline when the stakes were raised. What happened when James went back to a $3,000 account after destroying the $100,000 account? He was successful again and pretty much went on as is.
I recently heard a fellow trader tell me he has been ‘psyched out’ by the market many times. What they did not realize is the market just held up a mirror and showed him what his mind was like under certain conditions. The market didn’t force him to make a trade or decision, he did. It was their inability to realize something in them psychologically was being activated and steering them off course.
To be a trader means to hold yourself up to a mirror everyday. It means to embark on a process of self-discovery, particularly about two things which tend to bring out the Bugaboos and press all the buttons…that of your ideas and sub-conscious beliefs around 1) Success and 2 ) Money.
One of the most important things a trader can do (besides learning the market, learning a system, and proper risk management), is to learn more about oneself and uncover what unconscious or sub-conscious beliefs you have around money and success which are likely tripping you up. It is one of the most important things a trader can do besides learning the markets, is learning about themselves.
Trading is not you against the markets, or the market-makers, but you against you. It is a salmon like swim upstream against your emotions and psychological make-up that only you can uncover. Luckily, there are many things you can do to help build healthy ideas around money, abundance and success. By learning these methods, you will learn to make more intelligent decisions while trading, instead of emotional, or irrational ones which often cause the greatest losses.
For those of you wanting to learn more about what you can do to help build the mentality of success and abundance, make sure to come to the free webinar I am teaching this Tuesday with FXStreet on ‘The Laws and Mindset of Abundance‘
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Also make sure to check out this previous webinar with FXStreet I did whereby I talk about one of the Key Laws of Abundance.
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