Lose Your Mental Capital = Lose Your Money (and Your Sanity)

BY ON June 2,2020

A very common mistake by traders, even experienced traders, is to lose mental capital. Mental capital is the value of your ability to think. It is literally the capacity of your brain to process data and spit out smart decisions. For example, if you were to do an analysis on all of your trades in your current portfolio, would we be looking at one position, five positions, or fifty positions?

Let us use a simple example: Trader A has 3 positions, Trader B has 13 positions, and Trader C has 72 positions. Which trader do you think can analyze their current portfolio the fastest and most effectively, and then make decisions on what to do? Very easily, Trader A uses less mental capital than Trader B and C. Trader B uses less mental capital than Trader C.

Of course, this doesn’t mean only ever have 3 positions. But the point is simple: How many trades can YOU manage. Not me. Not someone else. Specifically you. Your mental capital is different than someone else. And as you trade more, that capital will change. And not always higher.

Sometimes it is as simple as you are just better at analyzing positions and spend more time per stock or crypto symbol. Or maybe you may have more things going on in your life from family, friends, children, work, or other elements that takes up more of your thinking power. It is important to realize that your mental capital for trading can actually be lowered because of other, non-trading things going on in your life. The key is recognizing your limitations and not exceeding them.

Remember, it is much better to trade 4 stocks at 100% effectiveness than 8 stocks at 50% effectiveness. I guarantee you that you’ll do better trading at a higher effectiveness rate. It will take time and practice to learn your limits and to be aware of when those limits need adjusting.

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