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Fear Factor: The Impact of Trading With "Sacred Money"

I am not a big casino gambler, but I have been at the venues in Las Vegas and Atlantic City, as well as in other casinos worldwide. I have observed a myriad of gamblers at the poker, black jack, roulette and craps tables. An interesting characteristic among gamblers is exhibited to me time and time again. It is this: The gamblers who appear to have money they can afford to lose usually are the ones who can win. The gamblers who appear to be using their rent or grocery money (or what I call "scared money"), and really should not be gambling, are usually the ones who lose.

You may ask, "How can you tell who is gambling with scared money and who is not?" Facial expressions, reactions to losing bets and to winning bets, and other "body language" are dead giveaways to me.

The "scared-money" phenomenon I see in casino gambling can be applied to futures trading. Those traders who are using grocery and rent money in their brokerage account and "must win" on their next trade, or else they will be forced out, have a huge emotional burden to carry. That burden certainly affects their trading psychology and ultimately their trading success.

The most common reason for scared-money trading in the futures markets is undercapitalization or being over-leveraged. A person with a $20,000 trading account should not be trading full-size S&P 500 futures contracts. A couple of moderate daily price moves against an S&P trader with an account this size could find him getting a margin call from his broker.

So, what factors determine whether a trader is trading with "scared money?" Is there a certain income or savings level a person must attain to not trade with scared money? Does one have to be wealthy to trade futures successfully? The answer is: There is no single right answer. It depends on the individual trader.

I hearken back to the all-important "psychology of trading" with an example. A person with a modest income and a prudent money-management plan can trade futures and do so without using scared money. He or she can trade options (buying them, not selling them), or trade smaller-sized contracts offered at the Chicago Board of Trade, or even trade regular-size contracts such as soybean oil, where the "tick size" is relatively small in dollar amount. In fact, I submit that a good percentage of speculative futures traders worldwide fall into the above category.

Conversely, a so-called wealthy person with a higher income and/or savings can still trade scared money. If the better-capitalized trader holds his purse-strings too tight and cannot accept the fact that even the best professional futures traders in the world can and do have losing trades, then he, too, is trading "scared money." I think we all know of at least one wealthy Scrooge who totes his money sack on his back and doesn't even tip the waitresses or bartenders. Certainly, individuals like that are not good candidates for successful futures traders.

Jim Wyckoff
TradingEducation.com