The most challenging task I have faced in 25 years of trading is the evolution from being a small individual trader to managing more substantial sums of money for myself and others. In the early days of my trading career, I was very happy to knock out small, consistent gains. I could do this by trading intraday volatility or by stock picking and catching trend trades. It was relatively easy to manage risk, and market volatility didn't create too much stress.
As the amount of capital I was dealing with increased, it became much more difficult to deploy capital productively. Trading with very short time frames still worked, but returns suffered because capital was not working hard enough.
The only way to produce returns that would make a significant difference required a different mindset. It was no longer sufficient to just focus on producing returns to pay my bills. I had to find ways to ramp up my trading so that much larger amounts of capital would be hard at work.
The challenge is that when you start trading bigger or more aggressively, you take on more risk. There is no way to avoid the relationship between risk and return. If you want bigger returns, then you have to take on more risk. You can still manage risk and try to keep it contained to some extent, but it will always be correlated with returns.
The primary hurdle for individual traders that are trying to evolve to a higher level is that they still think of trading in terms of money and what it will buy. When you trade for your personal account, then you tend to think of profits and losses in terms of what it will buy and how it will impact your life. You see this all the time on social media, where traders brag about buying luxury cars or watches with their profits.
However, this mindset can be extremely detrimental when it comes to taking on higher levels of risk. If you have a trade where you lose $10,000, it hurts much more if you think of it in terms of the money involved. $10,000 will be a lot of groceries or pay the rent. When you think about a trade in terms of money and the impact it may have on your life, then you are much more likely to be cautious and will avoid increased risk even if it is not disproportionate to the capital that you are working with.
Most traders have a very hard time increasing their tolerance for volatility and risk because they are still thinking about the trades in terms of money and how that may have made them feel in the past.
Stick to a Process That's Effective
The solution to this is to stop thinking of trades in terms of money and what it will buy. Instead, focus on the trading process that works. If you have the right trading process, then you will have more winners than losers, and you will grow your accounts.
The size of losses and the amount of money involved will not matter if you are sticking to a process that is effective. It isn't about the money, it's about making sure the process is working and producing favorable results over a long period of time. There will be bigger losses and bigger gains, but the emotional attachment to money has to be broken, and the focus shifted to working the process.
During this evolutionary process, there are going to be times when you feel extreme stress as the amount of money at risk is uncomfortable. You will make comparisons to how much that money would have meant to you in the past. "This is the same as two years of salary at my first job out of college." It is hard not to personalize risk in this way.
The evolution to trading bigger, taking on more risk, and trading more concentrated positions is still something that I have to work at every day. I have to make sure that I'm focusing on the trading process and discipline rather than thinking about the money that is involved.
If you want to take your trading to the next level, then stop thinking about what money will buy and focus on implementing a process that allows you to take on more risk.
