Many aspiring traders come to zero sum markets such as the futures market after successful careers as entrepreneurs. The mistake they make is thinking that the rules of good business apply to zero sum markets. While in some ways they do (buy low and sell high, for example), it’s the ways in which trading these markets is unlike other businesses that will fool you and cost you.
Futures markets are also different than the more ‘normal’ markets you may have been exposed to, such as equities. My research shows that the percentage of profitable traders is significantly higher in the equity market compared to futures. If equities are like fine wine, futures are like mescal with a worm at the bottom of the bottle; raw, potent and definitely an acquired taste.
Due to increased volatility and leverage, zero sum markets will challenge you in ways you have not been challenged before, and it will be difficult not to take losses personally. Shawn, for example, owned a chain of men’s clothing stores and fast food restaurants. He is a down-to-earth, warm, mild-mannered fellow who is easy to get along with and likes people.
Shawn has a “Midas Touch” when it comes to running businesses, but his relationship to the futures market has been marked by bouts of revenge trading that had led to a series of account blow ups over the previous years. Preventing acts of self sabotage is not a typical topic in a business school curriculum. But this is a critical topic of study for individual traders in this type of rough and tumble market.
In Shawn’s case, revenge trading meant he could not take a $200 loss, so when he was wrong he would find himself with a $2000 loss before he finally quit for the day. Shawn wasn’t emotionally prepared to lose because losing was incongruent with his self-image and his business experience. That attitude, of course, produced more losses.
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