Biases and Bad Behaviour Around Money 2

Today I’ll finish my take on some of the ideas expressed by Morgan House in  “The Psychology of Money“.

8. Failing to appreciate the power of compounding: listen to newbies – they look for 80% to 90% win rates and 100% (or more) ROI. The reality is for most traders (if any at all) to achieve those kinds of results year after year is not possible.

What kind of ROI is available to most of us? I’d say around the 20% p.a. – if you have the necessary tools (METHOD and RISK MANAGEMENT) and your application is consistent.

A $10,000 account will grow to $61, 917.36 over 20 years. That return is nothing to sneeze at. It may not be sexy or popular. But, here’s the point: you and I can achieve it, and to attain the result, you need only have the tools and apply them consistently.

13. Underestimating the need to allow for error (and, for me ‘luck’):  you see this especially for those trading futures and CFDs – they trade to the maximum size their margin allows. They fail to allow for that Black Swan that exponentially drives up the margins.

When I first started trading in the early 60’s, I read a piece of advice that I follow to this day: when trading futures (derivatives), the maximum exposure is 15% of your trading capital (across the open position portfolio).

Good advice. It ensures you don’t overtrade.

I’d love to hear from those who read House’s piece. Let me know what you think.