12 Reasons You Should Avoid Financial Speculation

I hope my passion for trading comes through in this blog.  It’s not just something I do to make money – it’s on the short list of things I care deeply about along with family, charity and God.  No joke.  When I’m sitting around and there’s nothing going on and that internal monologue everyone has starts up – well, mine’s about trading.  Maybe that’s a sign of mental disturbance.  I don’t know.  But it’s true.  When I go about convincing other people that trading could be a good job or side gig for them, it’s because I know some of them will find it as fascinating as I do.

But there’s a downside to contagious passions – sometimes the people who catch them aren’t the people you intended.  Engaging in financial speculation is a very good idea for some people, but it’s a very bad idea for others.  One of the things I’m just beginning to come to grips with about this blog is that people can use the information on it to make life changing decisions.  And if those decisions change their life for the worse, well, I’d feel pretty shitty about that.  So I want to step away from the passionate part of me for a bit, and try to dissuade certain people from taking up speculation.  To that end I’ve created a list of reasons you should not become a trader.  This isn’t a true or false test kind of thing.  Instead think of it like a filter.  If even one of the problems below sounds like you, you shouldn’t trade no matter if you pass the rest with flying colors.

  1. You don’t enjoy trading or are unwilling to put in the time: trading is a tough job.  If you don’t love it, you’re not going to succeed at it.  And part of loving it is putting in the time to really understand it.  In order to be successful you’re going to have to put in a few thousand hours of learning time.  That’s a major commitment over multiple years.  If you’re not looking forward to putting in that time, trading is not for you.  If you’re uncertain, use the demo trading period while you’re learning to assess whether you’re really enjoying yourself.
  2. You react poorly to stress: trading is stressful and you shouldn’t underestimate how negatively this can affect your life.  Some people react very poorly to stress.  They can’t sleep, get ulcers, become ill tempered with their co-workers and family, drink excessively etc.  Other people thrive on stress – they can’t get things done otherwise.  If you’re the sort of person that reacts badly to stress, or has a medical condition that’s aggravated by stress, trading is not for you.
  3. Your financial house is not in order:  The stress of trading is magnified 100-fold when your quality of life is on the line.  I don’t think anyone can trade well under those kind of conditions.  If your financial life outside of trading is a mess, trading is NOT the solution.  It will just make the problem worse. At a minimum, I think you should be living on your own, have a positive cash flow budget, no unsecured or high-rate debt and at least 6 months of living expenses in an emergency fund (totally separate from your trading money) before you consider trading.  If you aren’t there yet, there are lots of good internet resources on personal finance that can help you.
  4. You’re undercapitalized or can’t separate your risk capital from other money: getting started in trading takes a large amount of capital.  I’d say the bare minimum is $10,000 – the minimum to open an account at Interactive Brokers.  If you can’t swing that, you definitely don’t have enough capital.  Also, you need to be clear that the money in your trading account is risk capital – it can and very likely might be lost.  Most traders lose at first.  If you would experience serious negative consequences upon losing the money (like, say, your wife might leave you) then it’s not really risk capital and it shouldn’t be in your trading account.
  5. You don’t have the support of your family: trading, and especially trading losses, creates family stress.  BIG family stress.  You’re going to need the support and understanding of everyone in your family.  And you have to be truthful about the potential for losses.  If your spouse/partner doesn’t understand and approve, or even if you just sense confusion, conflict or resistance then don’t trade.  I’m very lucky to have a wife who understands why I do what I do and she seems to be comfortable with it.
  6. You’re bad at math and logic or don’t enjoy them: trading is increasingly about math and analytic reasoning.  The cigar-smoking, 3-martini lunching, deal making side of the business is dying with the advent of more exchange traded products and electronic exchanges.  Typically these days the parties to a trade never see or talk to each other. People and “streetwise” skills are being devalued in favor of nerd skills.  If you don’t want to develop those nerd skills and enjoy using them, trading is a bad choice.
  7. You have a moral objection to speculation: some people feel financial speculation is morally wrong – that it’s stealing from people.  This is frequently although not always associated with left-leaning political positions.  I disagree – I don’t believe my speculation is harmful.  I think the people on the opposite sides of my trades are getting exactly what they wanted.  In other words, a fair deal.  But plenty of people are anti-speculation.  If you’re one of them, don’t take up trading.  You’ll just sabotage your results due to internal conflict.
  8. You have addiction problems: trading, like gambling, can be addictive.  It has the same partial reinforcement mechanism at work as a slot machine.  Addiction can lead people to trade in situations where they don’t have an edge and stand to lose money.  If you know you currently have drug, alcohol, or gambling problems, have an addictive personality or have had problems with addiction in the past, please avoid trading.
  9. You have a history of suicide attempts, depression, or other mental illness: when trading goes bad, it brings out bad thoughts in people.  While rumors of traders committing suicide after trading losses are largely exaggerated (contrary to rumor there were no Wall Street window jumpers in the crash of ’29), the connection is not entirely without merit.  Perhaps more importantly, if you have these types of mental illnesses, you’re not going to be able to trade well.
  10. You’re not that smart: I’m going to catch a ton of flack for this, but it needs to be said.  At some level trading is a competitive, zero-sum game.  The battlefield on which the competition occurs is intellectual.  If you’re not that smart, you’re going to lose.  Not playing the game in the first place is a better choice than losing.  I would advise anyone with a WAIS or other legitimate intelligence test score of less than 105 (slightly above average) to avoid trading.  I’m not talking about bullshit internet intelligence tests.  I’m talking about the real, multi-hour proctored ones.  If you don’t have a score, you might consider getting tested.
  11. Your life has recently been disrupted: people make stupid decisions after bad life events.  The best explanation I’ve seen of this phenomenon comes from the gambling literature – Mike Caro’s “threshold of misery”.  His point is that once you get to a certain level of misery, it can’t get any worse.  Because of this, the rational part of our brains that tries to avoid the pain of bad decisions doesn’t kick in.  So for example losing money doesn’t hurt any more.  It should be obvious how this could negatively affect your trading decisions.  If you’ve just gotten divorced, lost a job, lost a loved one, etc. then don’t trade.  Take a month or so off, let the crazy blow over, and then re-asses your situation.  This applies even if you’re already a successful trader.
  12. You don’t have another means of support: trading income takes a long time to spool up.  Years typically, and lots of people never make it.  If trading is your only source of income during the learning period, you’re going to be screwed.  So you need some other source of income while you’re learning – a job, a tolerant spouse, whatever.  If you don’t have that, work on getting a job first and then come back to this list and see where you stand.

Hopefully none of these things apply to you.  But if they do,  I strongly recommend that you at least temporarily give up on trading.  Many of these problems are correctable – for example just because you don’t have enough capital today doesn’t mean that you can’t work to earn it.  So work on the other things in your life that need improvement, and then see if you want to come back to trading.

If you passed all the tests, well, good.  I look forward to seeing you around the site :)

This post appears in the Carnival of Financial Camaraderie #12,Totally Money Blog Carnival #47 and The Carnival of Wealth.

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