When I first started trading, I was drawn to day trading penny stocks for their allure of fast and seemingly easy money. I watched and learned from others benefiting from “pump and dumps” and other similar volatility type plays. I was coached and studied under Tim Sykes, and although I don’t trade penny stocks anymore (nothing against those who do, penny stock trading can be very profitable for some), Sykes taught me a lot. Many of these stock trading 101 tidbits I still apply to my trading every day.
One of the best things I took away was his theory that we have 3 types of bank accounts: one that tracks finances, one that tracks acquired knowledge (reading, studying, training, etc.), and one that tracks learned and hard-earned experience. As I understood it, if you have a built-up and strong knowledge and experience account, your financial account will eventually reflect that as well. But I’d like to add a fourth account that I found I had to keep up on too: my Mental Capital Account.
This was an account I monitored fairly closely, but not obsessively. Through the years, I found this pattern play out over and over again. It’s fairly common, and maybe you can relate.
It goes like this: I’m diligent, on top of things, tracking and calling the moves the markets are making well, and being very consistent with my trading overall. I have a plan as I watch the markets heading down down down, but I just have to be patient for it to take place. Getting bored, I decide to buy quick dips and/or dabble with quick shorting plays. I get cut up, frustrated with the silly little losses, and fall into a little losing cycle before I know it, I’m mentally tuckered out. What happens next? The original play I was waiting for with the overall markets takes place, and the huge V-shaped bounce I was anticipating occurs without me as I sit exhausted and frustrated on the sidelines.
Has this ever happened to you? It’s like you’re fighting against the waves, fighting until you tire out, and then the big, easy, and obvious plays take place without you. You’re busy licking your wounds and recovering from your silly degenerate trading habits that got the best of you. The more this happens, the more frustrating it gets too. Each time, you think it’s the last and you believe you must be learning by now!
I realized that I had to envision my trading stamina as an account unto itself. The energy I had for deep concentration, patience, and consistent integrity was finite and limited. Once I started getting emotional, I started getting tired, and I started making concessions within my trading and decision making. I needed to preserve my precious mental capital. It was a commodity for me, one that needed to be monitored and protected.
Without mental energy left in that account, I was no good. My trading went right in the garbage. I learned that I needed to watch and be wary of keeping my mind balanced. Spending it chasing and testing out every little thing I saw just wore me out. I realized I needed to save that mental capital for the big and most profitable moves. If I spent that capital already, it wouldn’t work out well for me.
My personal solution was pacing myself. I restricted myself to a certain number of trades per week. I suggest you tinker with this and find the magic number that works best for you. This rule saved me from falling into this trap. Now I almost always have the mental capital to withstand a volatile yet very profitable move that the market presents to me. I prioritize my plays and exercise patience for those big plays I have waiting for me on the docket. Simply imagining that my mental energy was an account and limited really saved me a lot of heartache.
