Trading is inextricably linked with money. You are taking risk in the markets because you want to make money. If you trade well over a long period of time, then you will make lots of money.

We all know what the results of trading success can look like, and that motivates us—the cushy bank balance, nice house(s), etc. Most traders are a competitive lot and they want to outdo themselves and others.

Less understood are the interactions between traders’ psychology and money. Traders, like anyone else, have a certain emotional relationship with money, and that can affect their trading for better or worse. If trading is all about “planning the trade and trading the plan”, then you’ll want to understand any topic that can interfere with trading the plan successfully. If you have an emotionally unbalanced relationship with money, then in spite of your hard work, you may be setting yourself up for failure.

It comes back to how we think about wealth. Robert Kiyosaki authored a famous book called Rich Dad, Poor Dad, in which he compared the different ways of thinking of a “Poor Dad” and a “Rich Dad”. In the book, Kiysoaki writes about his dad, who got a good education and worked hard but didn’t have much to show for it in the end, versus his “Rich Dad”—who lacked formal qualifications but thought in a fundamentally different way that led him to create substantial wealth.

Just like Kiyosaki’s “Rich Dad”, if we want to turn into a “Rich Trader”, we will want to internalize their way of thinking in order to achieve a similar level of success.

Our Relationship With Money

By itself, money is actually very trivial—it’s little metal coins, pieces of paper covered in ink or numbers somewhere in cyberspace.

Money carries enormous emotional charge because of what it represents. It signifies purchasing power to satisfy our material needs like food, clothing and shelter—and a lack of money leads to pangs of scarcity. Money conjures up safety and security—having “enough” means you can stop worrying about monthly bills and retire comfortably—and not “having enough” can be fearful. It also evokes status, as a substantial net worth brings higher social status—and its lack can lead to social rejection.

As such, we can form a very, powerful emotional relationship with money from an early age. The ramifications of these are tremendous and possibly life-long. They can either pre-program us for financial success or permanently inhibit our pursuit of it. Even better, we may not even be aware of them!

Some of the conditioning can be downright painful. Imagine a young child who doesn’t know any better and sticks his hand on a hot stove, only to burn himself and feel tremendous pain. He quickly learns to associate a hot stove with pain and avoids it almost reflexively. Similarly, people can develop reflexive, pained reactions to the idea of money. If you grew up poor, like I did, then you learn quickly that there “isn’t enough”. That the default reaction to any or every material wish is “we can’t afford it”. That can leave a strong imprint on you, as you begin to associate money with pain and fear.

To bring it back to trading: if you are striving to make money, and you associate money with pain and fear, do you think there might be a conflict between those two?    

A more positive example is if you grew up in a well-to-do household. You probably learned that “there’s always enough” and had generally positive experiences with money. Furthermore, you learned skills and behaviors that grew out of that mindset. You could enjoy the moment and concentrate on your studies because your material needs were taken care of. Your family would pay for college because it was a good long-term financial decision. In your home, you generally saved and/or invested money, so you learned how to make money work for you. That’s just the way things were, so instead of feeling guilty, you felt good about it overall.

Do you see how this also applies to the markets ? You feel like you can take the risk of getting into markets. Instead of being consumed by worry about money, you can focus on learning and getting better at your craft. You understand and are comfortable with the idea of investing your time in learning your craft, without being worried about the lack of short-term cash flow. In summary, you are better prepared for handling the risk, because it doesn’t frighten you in a raw, emotional fashion.

Related to these two is the idea of a “money thermostat”—i.e. a certain level of money that we are comfortable with and we are always returning to. If we are poor, relative to that comfort level, then we will work hard to get back into the comfort zone; on the other hand, we will not be comfortable with more wealth than that.

As traders, this idea sounds absurd. I can hear every one of you say “Nonsense, I would be comfortable with 100x as much as money as I have now”. Suuuuuure you can. Then why don’t you have it?

Hear me out. Imagine, for instance, when you were a kid and your parents gave you an allowance of $5 and it seemed like all of the money in the world! You would have happily gone and bought yourself a couple of candy bars and been quite content. If anything, your upbringing would have helped condition this thermostat, as they wouldn’t have given you $500 because it was “too much for you”. Even then, you learned that there was the right amount and too much. And imagine if they had given you $10,000. You would have more likely frozen in panic at the thought of what to do with “so much money”.

How does this money thermostat manifest itself in traders’ lives? The most direct is in terms of the size that they are trading. If you are trading dollar sums that are too big for you to handle emotionally, then you are scared of losing any money, so you scale back or don’t trade at all.

But if the sums involved are too small, then it’s hard to be emotionally engaged in the whole endeavor. Without that engagement, you start trading sloppily or “just for fun”, because the monetary rewards aren’t big enough to motivate you. Just like we wouldn’t care about any work where we would make $1/hour, we can’t get stimulated by trading if the money is too small.

There are more insidious ways that it asserts itself. Perhaps you can get up to a certain level of profitability consistently. You have built up a cushion so that you can withstand some drawdowns, so you decide to take a bit more risk and trade bigger size. But after several months, you find that you’re not reaching your new, higher profitability targets and are actually sabotaging yourself as you approach those goals. While no one likes to talk about self-sabotage, it is a reality. At times, you can be your own worst enemy, without even realizing it.

There is a golden mean here. You need to keep your trading size and risk appetite at the right level—where you are motivated and hungry without being too intimidated to make the right decisions. Then you need to get your money thermostat sorted, so that it’s not harming your pursuit of success and actually pulling you towards greater accomplishments.

How do you reset your money thermostat? There are a few steps to go through and I’ll walk you through them.

1.       Awareness

Whenever you are dealing with any situation that involves money, then you can become aware of your thoughts and feelings. Some of these signs may be very subtle and hard to pick up on,  but they are worth paying attention to.

Do you instantly get a knot in your stomach when you think about a big purchase? Do you think that you “don’t deserve” something that’s very expensive, even if it’s a gift? Do you find yourself with a relaxed attitude about money because “everything will be alright”?

These are common thoughts, feelings and emotions that arise whenever money or material goods come up. Just stop yourself for half a second and listen in on the chatter and pay attention to the habitual feelings and thoughts. By becoming aware, you will now have some idea of what is really going on with your money thermostat and where it’s set.

2.       Self-talk

Now that you can interrupt these thoughts for long enough to become aware of them, the next step is to learn how to change your self-talk to help you get what you want. Whenever you unearth a negative statement like “You don’t deserve that”, then challenge it! Ask yourself something like “How do I know that?” or “Where does that come from?”. Don’t dwell so much on the “why?”—that’s less important. Just keep probing until you unearth some answers.

Ultimately, these limiting beliefs exist because they’re trying to do something positive for you. For instance, your money thermometer may be set low unknowingly because your brain wanted to protect you from disappointment, or because it saw that money always brought pain. Now, unfortunately, those positive intentions remain, but the behavior that comes with them is no longer helping you. In that case, we want to keep the positive intention but to challenge the behavior until it goes away and we have shed some of that emotional baggage.

Put simply, what you want to do is to unearth gradually all of the garbage in your head that is limiting your prosperity and holding you back from achieving more material success. Shine a spotlight on your fears or insecurities, and they will melt away. Challenge them, and they will no longer bother you.

And whenever you have a positive, encouraging experience with money, then reinforce it. If you have money in the bank when you open your statements, then give thanks out loud! If you’re treating yourself to something, like a sweet with your coffee or a massage to relax after a stressful day, then tell yourself consciously “Yes, I can afford this and I enjoy it”. Or when you see a fancy car that you want to buy, “Yes, I deserve that”. This is the antidote to any negative money experiences and you want to keep reinforcing it.

3.       Visualization

Now that you can interrupt negative thought patterns, you want to find ways to encourage a “warmer” money thermostat. Visualization is at the core of two of my favorite books on wealth-building: Think and Grow Rich and The Science of Getting Rich.

The idea is quite simple. Make compelling pictures of wealth and income, or of material goods that represent wealth. For instance, it could be a new house that you’ll buy with your newfound wealth. Then, live in that picture—feel yourself in it, enjoying the all of the good feelings and without any negative feelings. With the house, you would feel the comfort and peace that comes with the home while leaving out thoughts like “how can I afford this?” or “how long will it take me to cut the grass?”.  Ramp up the feelings’ intensity—get yourself as happy and joyful as you can be. Take a few minutes every day in a quiet place to visualize your desired outcome and how good it feels, how much you want it, etc.

In trading, for instance, imagine yourself making double the profits that you currently do. Imagine something that you could do with the money—buy a new car, take a wonderful vacation, buy a new house. Or imagine a check with your name on it for a much bigger amount. Or you imagine a certain percentage return that you want to achieve. No matter how you do it, build that picture up and make it really compelling. And practice living in it every day.

With practice, gradually, you will become acclimatized to more wealth, removing any small mental barriers that may have been there—and helping your money thermostat to spur you on to bigger trading profits.

In a previous post, “What’s Your Number?”, I wrote disapprovingly about a certain phenomenon—looking to make a certain amount of money in order to check out and live a life of leisure. The reason I didn’t like it is because it is an anti-professional attitude, not consistent with good trading practices. The famous football coach Vince Lombardi never said “score a certain number of points and then get off the field”. Rather, he emphasized the building blocks of good football and the importance of doing those right all the time—because that’s how winners and professionals think. To this, I would add one point—having a “number” injects a whole lot of emotion into an end goal, thereby subjecting all of your trading to a money thermostat that much more. If the markets are bad and you don’t see any opportunity, then make the right decision—do nothing, rather than feeling the pressure to get to a certain number. If there are good market opportunities  then you certainly don’t want to limit yourself to a certain number. Instead, just focus on trading well.

Moving Past Your Money Thermostat

The real way to keep improving as a trader is to move way from thinking about money. Reframe how you look at trading and express as much as you can in percentages, rather than dollars and cents. That way, you can still monitor the important things, like return and risk, but you have removed the emotional charge that comes with money. If before placing a trade you think to yourself, “If I lose on this trade, there goes enough to pay for my summer vacation!”, then you are injecting a heavy amount of emotion into the situation, when it doesn’t even need to be there. If you change your thinking to “If I lose on this trade, then I’ve lost X% of my capital”, then you are putting the emphasis on proper risk management and removing any of the emotionality that comes with money amounts.

What you want to do is become a Rich Trader, and to internalize the way of thinking that leads naturally to success. You want to be able to ignore or minimize the negative effects of any fear or other emotions that can get tangled up with money. To do that, you need to focus on making good decisions—making that One Good Trade that Bella talks about. That way, you will find all of the success, material and otherwise, that you crave. You want to avoid thinking like a Poor Trader, who also puts in the hours but just can’t quite seem to get there—because he’s taking the wrong path.

This is the key difference between a Rich Trader and a Poor Trader. The Poor Trader, ironically, is concerned with money—with his bank balance, with how much he’s making right now, and how much he will need in order to check out.  In fact, the Poor Trader is just boarding the emotional roller coaster that comes with thinking too much about money.

In contrast, the Rich Trader cares about his craft. He wants to make good risk/reward decisions and to trade well. One way to do that is to stay focused on the core, universal aspects of good trading—having a well thought-out plan, sticking to it, letting his winners ride, cutting losses, managing risk and reviewing trades vigilantly. the Rich Trader thinks in terms of percentages, because it’s a universal way of expressing how he’s doing. By doing so, the Rich Trader is dulling the money thermostat’s emotional impact!

Ultimately, being a Rich Trader is more rewarding emotionally. Remember, money has an emotional charge because of what it represents, not because of what it is. The Rich Trader finds his career as a trader more rewarding because he is more satisfied by more than just money. Yes, he enjoys the material comforts that money affords. He also enjoys the security that comes with huge wealth. And deep down, he is happier because he has waged a fierce battle with himself to improve and win. He has stayed focused on making good decisions and knows that any monetary rewards are also a validation of his effort and discipline and focus. This feeling alone makes those monetary rewards that much sweeter.

By Bruce Bower | E-mail: Bruce [at] howoftrading.com

Blog: www.howoftrading.com | Twitter: @HowOfTrading