The biggest challenge you face day to day isn't the market. It's yourself.
Traders have a way of saddling themselves with unneeded extra emotional baggage that can weigh on their decision-making. The end result is emotional fatigue, frustration, and, possibly, underperformance.
Right now, I probably sound like a "low-T" commercial, but it doesn't have to be that difficult. The key is self-awareness.
What stage of your trading life have you reached?
Stage 1: Welcome to the Game, Newbie
Stage 1 traders are often hesitant on the first few trades, but once they get a taste of the rush and some profits, it's game on. Wild and carefree, they are going to take the world by fire, and become the next big thing. The most frustrating thing about not being a Stage 1 is knowing how little emotional baggage they carry.
These traders can, and in a friendly market will often outperform even the best of traders in the short-term for the simple reason that they've never been burned. They can throw caution to the wind, oversize positions, be aggressive, and take stupid risks.
These are folks that often love cult stocks with no hesitation to buy, hold, double-down, triple-down, then tell all their friends. Honestly, it's a whimsical carelessness I sometimes miss because it does open the door to a potentially huge gain.
That is until their actions in Stage 1 transform them into Stage 2.
Stage 2: Dang, I Didn't Know What I Didn't Know
The market eventually comes to collect her tuition. Thanks for playing Stage 1, but now it's time to pay the piper for your lack of experience and mispricing of risk.
After some lumps, a Stage 2 player will step back, study, learn, adjust their approach. Maybe they will read a few books or articles or even subscribe to something as helpful as Real Money.
Stage 3: Take the New Brain Out for a Test Drive
I like to refer to this as the experimental stage. After pulling back on the guns-a-blazing strategy, the Stage 3 trader will implement some of their newfound knowledge little pieces at a time.
Often, new strategies are put to the test as the trader searches for self-identity. It is here, they grow up and mature. They can empathize with traders who have blown up, admire, rather than mock, successful traders, and hopefully, they find a niche.
Most importantly, they begin to pass their experiences onto other Stage 1 and Stage 2 traders. Growing by learning and teaching. Once the growth plateaus and success achieved, they graduate to a very dangerous Stage 4.
Stage 4: Not Only Am I Smarter Than You, I Need to Prove I'm Smarter Than the Market
Many traders can thrive in Stage 3, but don't realize they could be happy staying there for the rest of their days. Instead, success breeds ego.
Teaching others and watching Stage 1s and Stage 2s fight the inevitable plus lean on you creates a feeling of superiority. You've given those below you all your knowledge, mastered several strategies and techniques yourself, but now you need to differentiate yourself, make a name for yourself. When people in Stage 1-3 think success, it's your name that drips from their lips first.
As a Stage 4 trader you have to separate yourself from what made you successful in Stage 3 because you were following things you learned from others in Stage 4. You can't be just like them, so you make bold calls. You scream your position until you are red in the face and your listeners are hard of hearing. You can't be wrong because you are smarter than the market. The market is wrong. They'll see, they'll all see.
Stage 4 is dominated by those who, while often solid traders, seldom admit failures. They will defend their position in the face of overwhelming facts against it. They'll be right...eventually. Perma-anything lives in Stage 4. What seldom lives here is trend-following because that's what Stage 1s do, and Stage 4s are smarter than Stage 1s.
From Stage 4, a trader heads to one of two places: back to Stage 2 or on to Stage 5. However, Stage 4 can last for a very, very long time.
Stage 5: Congrats! You Made It
Stage 5 traders go about their business like a silent assassin. They do their job. Hit their market. And don't crow about it.
They accept that you trade what works. Period. It can be simple. It can be complex. But they do it without concern of proving anything to anyone or stroking an ego. Your mental health and bottom line are the only things that matter.
Success is to be enjoyed, not flaunted. And despite reaching Stage 5, they will continue learning and often mentor future Stage 5s to join them.
While short of a TED talk, I hope this helps folks more than the low-T commercial they thought they might be getting at the start.
Tim Collins provides options trade ideas each day on Real Money Pro, our sister site for active traders. Click here to learn more and get great columns, commentary and trade ideas from Tim Collins, Mark Sebastian, Paul Price, Doug Kass, and others.