Earned money vs Free money

Earned money vs Free money

Sanju is a poor daily wage labourer living in a small hut.

By his luck, government declared development of an airport in the area where Sanju was living. Suddenly, the price of land in that region zoomed. Sanju sold his land for 1 crore and he became rich overnight.

Sanju got windfall of money without any efforts. He bought a posh car, designer clothes and jewellery for his wife. He started drinking branded wines and giving feasts. He started gambling to get highs and to banish boredom.

Within 2 years, Sanju spent all his money and became poor.

This anecdote illustrates that money doesn’t make person rich. He must have wisdom to handle money.

Moreover, free money is not valued as much as hard earned money.

Free knowledge is also not valued as much as paid knowledge.

Now, we shall discuss the point which I want to make. Why do traders take more risks with money earned from trading??

Let’s say,Amitbhai is a trader. He has trading capital of 12 Lacs.

He is well trained in tools of trading (technical analysis).He bought 10 lots nifty future.

Nifty rises 200 points within 2 days. Amitbhai made profit of 1.5 lacs within 2 days.

Now, he would take more risks as he is sitting on profit.

Next day, he placed more bets and lost 1 Lac. He is not pained because he thought it’s the profit went away.

This Mental bias, taking more Risk with Easy money (throwing away ), is one of the reason why 95-98% traders lose money.

Profit distorts their cognitive faculty. They think that Profit is Free money and ready to take more risks.

What should trader do then?

Lock the profit, transfer to some other asset. He needs to clear off the mental balance of profit.

Once profit comes to his account, it’s HIS OWN money and Not Free money of market.

He should not take more risks just because he made profit due to his luck.

Avoid Leverage trading which instills this feeling of free money in the minds of traders.

Calculate Reward:Risk ratio for all trades while entering and exiting trades also.

You must be wondering what’s this Reward:risk of Existing trades. When you exit from winning position you are taking risk of losing opportunity also. You need to calculate that risk and reward of existing.

In nutshell,

Respect the free money as hard earned money. Respect the free Knowledge as paid knowledge. (Someone might have toiled for years and sacrificed own pleasures to acquire knowledge.