Money to Brains Ratio

Just like everything, I find that we are given challenges to our ability to handle them. As our trading experience – and trading accounts – grow, we are given a different set of tests. Harder tests.

Something I teach in my course, not found anywhere else, but vitally important as you grow your account… it’s my Money to Brains Ratio. This essentially says that the more money you have, the less brains you have. In other words, as you develop your skills and your account grows, it can get wildly high with more money than you’ve dreamed possible. And that converts to less ’emotional value’ per dollar. If you work hard and earn only $50k a year in your day job, that income will be very valuable to you. You will likely carefully budget and watch your spending. But, if you are earning $250,000 a year trading, working easier and less hours doing what you love, the emotional value of that $250,000 will not be the same, and certainly not five times the value you placed on your income when you were slugging away at your day job. When you have lots of cash that you’ve not experienced before, you may tend to spend it easier.

In terms of trading, it’s easy to be distracted and try a new technique, especially with new found money. “Easy come, easy go,” as they say.

I had one trader, Amber, many years ago. She was doing quite well trading our strategy on SPY options. Then she discovered selling naked puts on FFIV. So excited, she announced how she’s making money on this newfound methodology. I asked her to stop. No, I told her to stop, explaining the ramifications of when FFIV drops. She didn’t believe me. “Come on, Hugh, I’m making money. Why would I stop?” I explained the impending margin call she would soon receive.  Still no response to my pleas. Eventually, she did get the margin call, couldn’t come up with the required capital and they liquidated her account. It was unfortunate and totally unnecessary as Amber was doing well and, I’m sure, would be in a much better spot today had she just stayed on track. Last I hear, Amber no longer trades.

So, how does one prevent self-destruction?  If you found a system that works, simply continue doing what you do. Do not try anything different. Just stay the course.

When these horrendous events occur, I often wonder if the right brain ever talks to the left brain. Intellectually, we know what to do. Emotionally, we are overcome by the excitement or need to strike it big.  When you hit your target, just close it all down. Do something completely different and forget about it.

Remember, it’s better to not be in a trade wishing you were, than to be in a trade wishing you weren’t.

Head Trader Hugh