One of the most dangerous beliefs and expectations about trading is to make the market pay for a “sudden need.” It defies the laws of order flow, liquidity and volatility. It is completely antithetical to trading as well as order flow trading success.
Even if you think that you are placing a decent trade that you believe will pay for your sudden needs, you still need order flow and liquidity to validate your trade.
Paying For Sudden Needs With Trading Profits
Let’s say you have created a sudden need, perhaps you made a few large purchases on your credit card, you bought a new car, a new house, etc. And if you have not paid for them, then you create a sudden need for money. And some people resort to the financial markets in order to pay for this sudden need. Yet others try their luck in the casino.
Some people may have had a nice trade that netted them a 10%, or 20% gain, and they start thinking that they can do this again to generate some nice income and use it to pay for all sorts of new toys and gadgets. Well it is true that traders can continue to catch the great trades. But if you create a sudden need for the money (by spending and borrowing too much) and expect your trading account profits to pay for it, then you are generally setting yourself up for a large amount of pain.
You can want the money by a large amount. You can need the money. The market is not obliged to give you the profits.
This can cause people to force themselves into trades they would not otherwise make. The person needing a certain amount of money by the end of the week lets say, they may place a more leverages position than usual, perhaps expect the market to explode with volatility and make a 500 pip move, when in reality there was no order flow to back up such visions of a grand trade. But that sudden need of the trader made them perceive something which did not exist.
The person trading to pay for a sudden need suffers a double whammy. They are stressing themselves to capturing a lot more inefficiencies and trades than they normally would. They are also attempting to trade them with bigger leverage than usual.
They not only need to successfully identify such trades and execute them flawlessly, but they also need the market to give them this trading volatility that they seek. For the trader may be extremely skilled in identifying the best order flow trades that move the market 500 pips and executing them, but the if the market does not experience such volatility for many weeks, then the trader wanting to pay for the sudden need is out of luck. Then that is when the trader goes down the path of perceiving trades and order flow generators which do not exist, thus setting themselves up for disaster.
Floored – Greg Riba
In the Floored Movie Episode 4, the floor trader, Greg Riba talks about this. You can scroll to the time of 7:21 for the Floored Episode 4, where it starts to talk about Greg Riba.
Greg Riba says:
The only thing about trading is, just don’t lose money. When you lose money it changes everything.
You can’t keep going on losing money and expect to live the same life.
Somehow God or somehow some spiritual thing just whacks you.
You want to buy something expensive because you’ve made it… you’ve made enough money to buy it.
You start losing every day.
You buy a house, you can’t make any money anymore. You go on an expensive vacation…
When Riba talks about the buying something expensive, houses, etc that is a form of sudden need that many traders cause on themselves when they start getting slightly successful and start to suffer from.
That sudden need for a surge of trading profits in order to sustain an exorbitant lifestyle, or to pay for recent spending spree can set your trading account up for a drubbing. Greg Riba talks about you start to lose money every day.
Then eventually you are staring at a depleted account, and if you still decide to pay for your sudden needs with your trading profits, you need to make up the losses you just recently took and make a profit after that, which is not exactly the easiest thing to do when trading from a highly emotional state generated by the desire to pay for your sudden needs through trading profits. That can set your trading account up for a death spiral if you do not realize it. It can even cause you to start placing revenge trades.
You Don’t Have To Be Stingy
That doesn’t mean that you can’t spend any money when you are trading. It doesn’t mean you can’t buy yourself some new toys and fulfill your dreams with your trading profits. Of course you can. After all, many people are trading in order to attain financial freedom. All I am saying is to be careful about creating these sudden needs and expecting to have consecutive killer month after killer month to pay for exorbitant spending sprees.
Because if you can generate a 10% return every month with a $20,000 account, that’s $2k per month, not bad. But the faster you can re invest the profits back into your own account and the faster you get the account up to $100,000, then a 10% month means $10,000 per month, which is a much more comfortable life.