“How much money should I trade with?”
Every single trader who started trading has asked someone this question. But before we get into the answer, we need to know this:
It is very important to trade without emotions. I will say that again. If you are detached and emotional, and greed and fear do not affect you, you will be a profitable trader. In fact, you will be a trading legend.
I am going to say that again. The only thing you have to get right in trading is your psychology and your attitude towards money. Everything else will come to you.
Emotions lead to bad decisions. It is easy to be unemotional if the money you are trading with means nothing to you. But the moment it means something — like a loan repayment, or a credit card bill, or a home loan EMI or kid’s education fund, it becomes tricky. You get nervous, stressed, and emotional. You start making the wrong decisions.
It happens because if you have something important to do with that money, you cannot book a loss and lose that money. This kicks in loss aversion. Yes, you guessed it right — this will make it difficult for you to hit the stop loss and get out of the trade. Ironic as it may sound, you will not be able to prevent losses on the money you can’t afford to lose — because you are unable to stop losses on it. You can read that last sentence again.
Bottom line — Trade with money you can afford to lose without feeling anything about it. Trade with money which means NOTHING to you.
Tailpiece: This also means that you should never have a trading target. You do not trade to achieve a target and do something with it. “I am going to trade with 2 Lakhs, make it 5 lakhs and buy a car with it” is a terrible idea.
What you should do instead is,
“I have everything I need for now. I have savings, investments, etc. I have 2 L extra which I have no idea what to do with. So I am going to trade with it, and I do not care if I lose it, because it will not affect my life. I will just keep doing the right thing with it without thinking about the results.”
It is all about your attitude towards money. You should not chase a money target or run after money. I will leave you with a quote from the legendary Nithin Kamath:
It was something a family member once told him about the Hindu goddess of wealth, Laxmi:
“She sits on a lotus, which floats. You can’t chase something that floats. It will only move away further. You have to do the right things, and hope she floats towards you.”