- 1998: Volume 7, No. 1 Scared Money

What does your trading account represent to you and your family? Is it your savings account, your family retirement, the children's education, your next vacation? If it is any of these things or endless others, then you are probably trading with what I call "scared money." Money in trading that is thought of as anything but inventory for your trading business is scared money. When emotions are attached to trading capital, by you or your family members, the likelihood of loss increases because decisions that are charged with emotion will sabotage your trading efforts. 

Strike One

Greg called in a panic. He lamented, "I've got to make money! I'll do whatever it takes, but I've got to make money." Because he wanted the consultation as soon as possible, my assistant faxed a copy of our Traders' Evaluation to him immediately so we could find the elements we were dealing with psychologically. We set an appointment for the next day, and by morning, he had faxed not only the completed 14-page Traders' Evaluation, but also a 10-page typewritten analysis of his whole life. My first reaction was to have my assistant call him and inform him that the evaluation took between 20 and 30 minutes, and more time than that would be needed just to read the letter. However, I found myself caught up in the drama of his life from reading his letter.

In describing himself, Greg told how he had successfully worked his way through medical school and his entry into practice. He was a good medical doctor, but running a business was not his strength, and after four years in practice, he had been forced to file bankruptcy losing all the money he had borrowed to set up his medical practice. Despite the temporary failure, Greg made a good living practicing medicine for an HMO which had an automatic retirement contribution plan. Rather than considering this a retirement fund, Greg saw it as a source of funds to recoup his losses. Even with his best intentions, Greg's entrepreneurial spirit continually kept him in financial trouble as he tried various side businesses and multilevel marketing schemes, most of which failed.

Now retired from medicine, Greg wanted to be a futures trader. He read a few books on trading, purchased a trading system from a vendor, and paper-traded the system for a month. With this background, Greg thought that he was ready to trade with real money. He had $25,000 with which to work. Unfortunately, this represented the last of his family's savings and he knew that without additional income, he and his wife were facing the prospect of living a very modest lifestyle. Complicating matters further for him were a variety of health problems, relationship issues, and addictive behaviors.

Greg's Traders' Evaluation showed that he did not have the psychology to support disciplined trading which was something he did not want to hear. At the time, he could not afford to work with me privately to improve his situation, nor could I afford to choose him as a client. However, because of his determination, I wanted to give him some guidance which would prove to be beneficial. I suggested to him that he needed to complete a good trading business plan and offered to provide him with a model of one if he did not know how to set one up. I urged him to complete the plan and explained that it would help him to see the reality of his situation and would give him a direction to proceed. I knew that if he were ever going to turn scared money into seed money, he would have to see workable and positive results from this plan. 

Strike Two

Travis was a very successful trader at one time in his life. During his first wife's unsuccessful battle with cancer, Travis could not follow his trading rules and lost everything he had. Several years later, he met and married Bonnie, a corporate executive, who loved Travis dearly. She recognized his talent for trading and wanted to help him get back on his trading feet.

With Travis' return to the trading world, he was able to draw on the lessons learned onhis first trip toward financial success. He told Bonnie that if she would give him six months to establish himself, he would put the world at her feet. Bonnie made a good income, and she had $100,000 in savings which she willingly gave Travis to work with. In the first three months of preparation, he spent $40,000 for computer equipment, software, and start up costs. Bonnie did not object because she totally trusted Travis to use the money wisely.

Then, the time of reckoning came. In the past, Travis considered draw-downs to be an inevitable part of the process of earning money in trading. Now, these same draw-downs represented fear and that fear created failure. Each day he traded, he became more manic-depressive. Bonnie, who was sensitive to his mood swings, also became depressed. This depression eventually turned to fear leading to mistrust and conflict in their relationship. At this point, the pressure on Travis to trade well became so intense that he lost the last of his trading capital in one dramatic trade. This loss not only wiped out his trading money, it left a large debt because it was highly leveraged. A part of Travis wanted to end the day-to-day emotional roller coaster ride and that part of him sabotaged the best of his efforts.

Many traders fall into the trap of thinking that psychological issues can be overcome with money and technical education. When a trader has established a pattern of being unable to follow his trading rules, the subsequent losses create negative psychological anchors which will in turn, create conflicts sabotaging good trading results and planning. 

Home Run

Yosef was left an inheritance by his parents who had escaped from Bulgaria when it was under Communist rule. This young couple's early dream of freedom motivated them to secretly plot an escape by frolicking near the border while wearing bathing suits on a hot summer day. The belongings they carried with them were in a picnic basket. In order to reduce suspicion, they carried no cash or personal memorabilia figuring that if they were stopped their innocence would be apparent. Luckily, the attention of the border guards was drawn by other escape attempts, and they were able to cross the frontier without incident.

Yosef's parents worked long and hard. They saved every penny so that their children could enjoy a more fruitful life than they had. Their escape from Communism into freedom represented the gift of a lifetime for them. Yosef was always encouraged to follow the path of his dreams no matter what the cost, and when he decided that his destiny was to become a trader, he viewed his inheritance as the "seed money" for success rather than scared money. He saw trading as the opportunity to financial freedom for himself and his family.

Yosef found many hurdles on his pathway. First, he had to find the right trading system. Then, he had to discover the best money management rules to use. And, when he could not follow his trading rules, he realized that he had to handle psychological issues which could have sabotaged his efforts. Once these hurdles were overcome, Yosef was well on his way to financial freedom. 

Stories to the Hall of Fame

Everyone has stories to tell which justify the direction their lives have taken. The most compelling of these stories drive people to reach the heights of success or find the depths of failure. We all like to dramatize our stories because drama stirs emotion, and most people are attracted to powerful emotions and feelings. This is especially true for those individuals who appear to suppress their feelings. The choice is between stories that will lead to success or to failure. Yosef could have entered trading with scared money rather then seed money as he certainly had a good story to justify "scared thinking." The problem remains, you can consciously choose a positive story, but negative anchors from the past can weigh you down.

Here are a few questions to determine if you are trading with scared money:

1. Is your trading capital free and clear of negative stories and psychological issues?
2. Do the people in your life support your use of the money for trading capital, or do they see it as family money to be used for other purposes?
3. Are you realistic about the results your system can give you after the cost of doing business?
4. Will your projected profit from trading be sufficient to support your present lifestyle?

If your answer to any of these questions is "No," then you are trading with scared money. You will find it very difficult getting to first base in trading, let alone hitting a home run. 

Conclusion

The money you use for trading capital is inventory and seed money for your trading business. The more emotional attachment there is to that money, the higher the probability that you will sabotage your trading results. Handle the psychological conflicts attached to your trading money before you add more hurdles to becoming a trader. Otherwise, you will add unnecessary stress to your life, and risk losing the opportunity to become a successful trader.