The Trading Money Management ‘TRICK’ You’ve Never Heard Of

There is an aspect of trading that tends to go unnoticed amongst most traders, and it’s something that could be slowly destroying your trading account (in all honesty, it probably already is). As traders, we are dealing with numbers on a computer screen; digital representations of our cold, hard cash. As a consequence, we often forget about the impact of not actually touching, feeling, smelling or seeing the money that we win or lose on a trade. The impact of having no physical interaction with the money in your trading account as you win or lose on trades, is very real and very significant…

The primary issue with never touching, smelling or seeing the money you lose or win on any given trade, is that you become desensitized to the true, real-world significance of it all.

Physical money vs. Digital money

Let me ask you this…which of the following two scenarios would make you angrier (amongst other emotions)?

1) You are at the ATM machine and you just withdrew $500 from your bank account for a night out on the town when someone runs up on you unexpectedly, knocks you over and takes the $500 from you and then runs off.

2) You are sitting at your computer, in your own home, in your underwear drinking a beer and your stop loss just got hit on the EURUSD short trade you entered two days ago, also resulting in a $500 loss.

I’m willing to bet that you answered “scenario 1” would make you angrier than scenario 2. Yet, the same amount of money was lost in both situations, so why the different reactions? In scenario 1, the money is much more “real”, it was in your hands, and you touched it and maybe even smelled it; you had a physical connection with it. In scenario 2, you simply saw a digital representation of your money decrease by $500, but you felt no actual physical loss of that money.

I know what you might be thinking right now, you might be thinking something like “I do feel the money when I lose or win on a trade Nial, I don’t need to hold the money in my hands to feel the impact”. I know it’s easy to think this, because I thought it before too, but the truth of the matter is that one of the big reasons people tend to lose money in the market is because of the whole “out of sight, out of mind” aspect of it. When you lose money on a trade it has much less impact than losing the same amount of money to a thief at an ATM machine, and when you win money on a trade it also seems much less important to you than if you found a pile of actual cash while walking through the park….even if the amounts were all equal.

How to feel the true impact of your trading wins and losses

I know this might sound silly, but hear me out, because it works. Back when I first started trading, I struggled with money management like most traders do at some point, so I came up with a little ‘trick’ to make the impact of each win or loss seem more ‘real’ and impactful. I simply took two large jars, you can use bowls or any type of container really, and I got out my poker chip set and gave the chips a value equal to my trading account. The different colored chips were assigned different values and I made it so all the chips together added up to 100% of the value of my trading account.

Then, I wrote “Profit” and “Loss” on two pieces of tape and taped one onto the outside of each jar. After every trade, I put the corresponding amount of chips from my “bank account” which was simply the poker chip case, into either the “Loss” jar or the “Profit” jar, depending on the outcome of the trade of course. I set these jars on my trading desk, so that they were staring me in the face whenever I was analyzing the market, contemplating a trade, placing one or exiting.

The effect of this “trick” was that I had a TANGIBLE way to feel the profit or loss of every trade I took; I had something to touch and look at. I was not just seeing a digital number increase or decrease, I had a large physical reminder of my ability to trade successfully, or lack thereof. More importantly, what the poker chips and jars represented, was my ability to manage my money properly and stick to my trading plan.

Accountability matters

Unless you are the most disciplined person on Earth, you probably struggle with sticking to your trading strategy and being patient enough to wait for high-probability trade setups. You probably also struggle with keeping your risk per trade consistently below a certain maximum dollar amount. A big reason why you struggle with those things, as almost all traders do, is because you have no thing or person to be accountable to.

When you go to work every day, your boss is there. If you do something really wrong or stupid at work, you might get fired…you are accountable to someone. As a trader, you are only accountable to yourself, and for most of us that means we let things ‘slide’ a lot more frequently than we would if we had a “trading boss”. This sliding, means doing things like entering the market on a ‘whim’ when no real setup is present or doubling up your risk because you want to ‘make back’ the money you just lost. There are no consequences except losing money, and money you won’t even be touching or seeing at that. So, we can see that trading is almost designed to numb us down and make us desensitized to the real-world impact of the money we are making or losing.

Money management can be one of the most difficult aspects of trading for most traders. Thus, having a “prop” to fill in for your real money, like poker chips or Monopoly money, will add an element of reality to your trading that otherwise won’t be there. So much of managing your money correctly in the market revolves around feeling and understanding the FULL IMPACT of your wins and losses, and using poker chips or Monopoly money is a great way to constantly remind yourself that you really ARE losing REAL money that you worked hard for, or that you are making real money that you can use to better your life with (so don’t gamble your profits!)

“Seeing” your money management ability is critical

The poker chip / Monopoly money “trick” I discussed above, can help give you something to be accountable to as you trade. After all, no one but you really knows your trading results, so having the physical presence of fake money in your house will help you stay on track and remain disciplined. If you live with other people who know you are trading, it’s easy to keep your results a secret from them and even lie to them about how “good” you are doing and simply ignore telling them about the losing trades. However, if you have two large containers of poker chips you are using or fake Monopoly money that you’re keeping score with, everyone in your house can see your results, and it will be quite apparent to everyone if you break your money management discipline, this gives you yet even more accountability.

It’s easy to “forget” that you are getting off-track and trading without discipline when the losses are conveniently hidden away in the trading account history of your MT4 platform, which you have the option of simply never looking at if you choose not to. However, when you use poker chips or Monopoly money to keep track of your trading wins and losses, you have a very real reminder and reflection of your ability to stay on track and trade with discipline, and if you break that discipline you have something staring you in the face essentially PROVING to you that you don’t have the discipline to trade successfully.

Manufacturing discipline

The point of today’s brief lesson is this: Money management discipline can be hard to maintain when trading the market because everything is done on the computer and there is no real physical sense of making or losing money. Thus, traders tend to become “numb” to their wins and they end up abusing their trading profits as a result, and they become “numb” to their losses which makes the loss seem less significant than it would if someone took the money from their hands.

To counteract this “numbness” to the money you win or lose on your trades, it will help to use Monopoly money or poker chips, as I described above, to make the results of your trades seem more “real”. This is a very effective “trick” or tool that you can use to develop yourself into a disciplined trader, then eventually, once you’ve turned that discipline into a habit, you won’t even need the poker chips or Monopoly money anymore.