Saturday, March 13, 2010

Tentative plans to re-enter the game

You probably predicted it; that I would eventually have an itch to trade again and succumb.

Well, if you did think that, you're wrong. I've actually been contemplating a more prudent path to re-entering the game. I don't have a longing desire to simply trade for the sake of trading (a sign that you're surely about to lose money out of the sheer urge to place an unwise trade), but I do see an overextended market that may consolidate and go higher, or be rangebound for a while. Things also look interesting with the smallcap financials that have been extremely volatile lately.

However, I'm not quite sure when or even how I'll start trading again. I'm considering remotely trading through a prop trading firm, which would limit my downside risk to however amount I decide to deposit.

On a side note, I had a bit of a flashback the other day to a time when I felt that trading was actually very easy. This sort of a thing happens when you're on long, boring winning streaks. My demise at the time was thinking of it as boring winning streaks, where I would typically make $50-$300 a trade and get lulled into wanting to take more risk for greater returns. Little did I know that the psychology of trading not only depended on my assessment of others and how I might view the markets accordingly, but also in the factors affecting my own psychology during the trading day (such as reaction to wins, losses, and inactivity). In other words, I didn't realize that my ability to identify good trades resulting in small, consistent wins were actually dependent on the lower-risk nature of the trades and not a standalone ability to identify good trades. I know that sounded a bit convoluted, but it's consistent with studies in behavioral finance that confirm that making money produces less of a positive reaction in people than does the pain of losing money. That's why it's key to keep yourself in check (or as I've suggested earlier, with the help of a partner) and not seek extra "excitement" after you've figured out your optimal trading strategy.

This might partially explain why many people who make a lot of money find ways to burn it rather than wisely saving; constantly making more money doesn't necessarily make you happier so you've got to go over the top sometimes to neutralize the feeling of losing money or losing precious time at work (or the equivalent of business declining for a small business owner). That's also why it's better to be more charitable as your wealth increases, or intentionally make time for hobbies and fun activities to serve as reminders and motivation for continuing on a winning financial path. Otherwise - and I've been a victim of this - you might just dig yourself into a hole for the sheer challenge of finding your way out of it. Diverting that drive to something more productive/rewarding is undoubtedly much better for your long-term financial and otherwise mental health.

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