My biggest mistake

Mistakes are a part of trading. They’re a bad part of trading, and we generally do everything we can to reduce those errors. In fact, for developing traders at certain stages, the difference between profits and losses can simply be eliminating errors.

Over the years, I’ve made every boneheaded, stupid trading mistake possible: I’ve bought instead of sold, I’ve doubled up positions instead of exiting (by buying instead of selling!), I’ve ignored stops, I’ve taken frustration trades, I’ve skipped trades because I was afraid… the list goes on and on. I will say this: many of those mistakes I made one time and took the lesson to heart. Many of those mistakes were also made very early in my trading career. But if I’d just read about them, I don’t think I would have had the powerful learning that came from the pain of doing something dumb and losing money.

Most of those mistakes are so blazingly obvious you’d probably never make them yourself. (Actually, if you trade long enough, I bet you make most of them lol.) But there was one other mistake I made for a portion of my career that is a real killer:

That mistake was to trade with money I could not afford to lose!

Now, I know there are plenty of services that tell you you can open a trading account with a small amount of money, and grow that account into an amount that will support you and your family in a lavish lifestyle. They will justify this claim by showing you upward sloping equity curves, talking about the compounding power of interest, and probably suggesting a few trades with 1,000% return will help.

They are lying to you. I don’t know any other way to say it, and it has to be said because this is one of the keys to trading with the right psychological framework.

You cannot win consistently unless you can allow yourself to lose. If you are in a tight spot financially, as I was at the time I was making this mistake, every loss will be translated into something real: “there goes my car insurance payment for the month”, “that was my house payment”, “if I lose a few more times like that I’m going to have to stop trading.”

I don’t think there’s anything magical or mystical going on here, but when we focus on something, we tend to move toward that thing. Even if our focus is a burning desire to avoid it, focusing on something tends to attract us to that thing. If we are focused on avoiding losses… well, we have lots of losses.

When you can fully accept loss, something magical does happen—you finally find yourself in a state of clarity. Many former problems “fix” themselves with astonishing clarity. You might just find yourself winning instead of losing.

From a practical perspective, I think the lesson is this: your trading account needs to be true risk capital. Especially at first, it needs to represent such a small amount of money to you that you don’t think about the finances. (This is also why I advocate a period of backtesting and then papertrading before committing any real capital.)

There are good and bad ways to work with a small amount of capital. One of the other huge errors I see from small traders is trading tiny stocks. Yes, you can buy 10,000,000 shares of that $0.001 stock, but should you? Trading is all about consistency, so think about how you can build that record of consistency. Maybe you should be buying a few shares of a larger stock, instead. Maybe you should be trading currencies, where you can trade tiny positions. Basically, you’re going to lose while you’re learning, so keep those losses small.

If you are in a bad spot financially, I’m not saying you can’t learn to trade. Yes, trading can be a significant and meaningful part of your financial picture. It can literally change your life. These things are true, but make sure you are learning with a tiny amount of money so you can learn without feeling the pressure and burden of losses.

When I look back over my career, I think this was the single biggest mistake, and it guaranteed my failure in that period of my trading: scared money never wins, for good reason. Trading with money you can’t afford to lose is a sure-fire way to lose.

Understanding this can point you toward some answer for your personal financial situation and for the future of your trading program.


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.