Janice Dorn, MD, PhD
Neuropsychological Trading Coach
Janice Dorn, M.D., Ph.D., has been a full-time futures trader since 1994. Doctor Janice holds an M.D. in psychiatry and is board-certified by the American Board of Psychiatry and Neurology in general psychiatry and addiction psychiatry. She holds a Ph.D. in brain anatomy. A graduate of Coach University, she is a pioneer market psychiatrist and financial neurobehaviorist. Doctor Janice has written over 500 articles on the financial markets and coached over 600 traders worldwide. She is the Global Risk Strategist for Ingenieux Wealth Management Group, Sydney, Australia.
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What is your biggest problem with your trades? I’ll bet it is not your stock picks or the entry. Let me guess…it’s your losses. The way to reduce the long term effect of the losses is with proper money management.
Money management is the most neglected, and the most important aspect of trading any market. New and intermediate traders tend to fixate on entries and exits and every new stock indicator out there. They'll tell themselves that money management is “something I’ll pick up later when I need it." But here's the deal......If you lose 50% of your money; you need a return of 100% to break even. year after year. If you lose 100% of your money, you have none left and you need to get another job.
A large part of money management is position sizing, and it has two components-- psychological and practical.
From a psychological point of view, popular piece of advice to beginning traders is to do "paper trading." That is you gain experience by “trading” for a while without using real money. You go through the motions of buying and selling without using real money. and utilize your trading strategy you have as if you were trading " for real."
DO NOT PAPER TRADE. It is one of the worst things you can do because it makes you overconfident or underconfident and does not take into account the true reality of trading. Emotions are over 85% of trading, and paper trading does not take this into account. Thus, you are missing the most important aspect of trading when you are on paper. You do not experience fear, greed, happiness or panic when you paper trade.
The emotions from paper trading are not real and have nothing to do with the roller coaster of emotions you feel trading when your money is on the line. Only by actual trading do we make all the mistakes we need to make in order to make ourselves strong and resilient and brave and confident as traders.
Now that this is out of the way, and you have time to digest what I have said, I will write in Part 2, Practical Aspects of Money Management in the next few days.
Every man is a suffering-machine and a happiness-machine combined. The two functions work together harmoniously, with a fine and delicate precision, on the give-and-take principle. For every happiness turned out in the one department the other stands ready to modify it with a sorrow or a pain--maybe a dozen...Mark Twain, The Mysterious Stranger
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