In this overly sensitive day and age it is commonly said that in order to get the most out of people you need to be very positive with them. Nothing negative. While I agree that having confidence is an absolute must to perform in just about any activity you can think of – definitely including trading – and that positive feedback is necessary, to only take a positive approach just simply doesn’t get it done.
Let me put my coach’s hat on for a minute. In athletics we definitely spend a lot of time, especially with younger athletes, building their confidence and being positive. I can tell you, though, that it takes the fear of punishment to really motivate them at times. Why? Because fear of pain is a very strong motivator.
Pain, in the case of sports, is something like sprints or push-ups. Pain for a trader is loss of capital. Even more, it’s the psychological pain that can come about when a loss comes about as the result of poor decision-making, something for which we have to blame ourselves.
Now of course trading means taking losses at times. It’s going to happen. Every trader has to be prepared for that and realize that controlled losses may create portfolio pain, but if they are just a poor result from an otherwise good trade, then there need not be the mental pain. A good trader recognizes the potential for pain from outsized losses and seeks to avoid it with strict risk management.
Like learning to avoid the pain of touching a hot plate, sometimes is takes getting burned by the markets to develop the excess trading loss pain, though. We’ve certainly all heard stories about people blowing up their accounts because they took too much risk. The good ones learned from it, just as we learn not to touch the hot plate.
On the other side of things, the reason we trade in the first place, is greed. I’m old enough to have seen Wall Street in the movie theater when it first came out. I distinctly remember the now famous ”Greed is good” speach made by Gordon Gekko. It was very much an 80s sort of seen, and the idea of it was to portray the psyche of the times, but there was a lot of insight there.
Without greed we would not have a hope of doing well in the markets. Trading, like anything else, requires a motivation to excel. Since trading performance is measured in terms of money, that directly implies a greed element. It takes greed to drive us to seek positive trading results and to keep getting better as traders.
Now of course in the case of both fear and greed they must be experienced in moderation. Too much fear makes you freeze up, while too little leads to taking excessive risk. Too much greed also leads to an overly aggressive approach, while too little means apathetic trading. A good, well developed trading plan can help you to keep both of those emotions running at healthy levels and dramatically improve your long-term chances for sustain success.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
** See John’s full bio.
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