In today’s episode, we are going to be discussing the concept of a financial thermostat and how your default setting may actually be holding you back from achieving the trading success that you know you deserve!
It’s no secret that trading is linked with money; if you think about what initially drew you to this industry, most people would agree that it is the allure of making life-changing money.
After all, what do we spend most of our days fantasizing about? How life as a successful trader would look like! Luxury homes, large bank account balances, exotic sports cars, and really, the freedom of time to do whatever you want whenever you want.
Now, if you’ve been with us for any amount of time, you’ll be aware that it is the logical side of your brain that actually desires and wants these things, but it’s really the subconscious mind that actually runs the show! So if your relationship with money is not aligned with your financial goals as a trader, then you will find a way to self-sabotage yourself and your results.
Our goal today is to help you identify what your default financial thermostat setting is and how to adjust it so that you shake out the beliefs that don’t serve you and replace them with those that will!
Your Relationship With Money
Before we dive into what a financial thermostat is and how to adjust it, we believe that it is important to first identify your relationship with money.
- Every single human being has a certain relationship with money and as traders, the type of relationship that we have with money will impact the trading decisions we make regardless of whether they are in our best interests or not.
- A lot of successful trading has to do with planning your next best trade and waiting for the market conditions to align so that you can execute according to your plan. The issue for most people is that they are unable to follow the plan successfully and this is where your relationship with money may provide some insights into your own trading behaviors and habits.
- The unfortunate reality is that if you have an emotionally unstable relationship with money, then regardless of how hard you work, you are setting yourself up for failure as a trader.
- Think about your own thoughts and beliefs that come up when you think about money.
- It might represent things like social status, security, safety, scarcity, opportunity, even resentment.
- Did you know that a majority, if not all, of these beliefs, were formed during your imprint years up until the time you were about 7-8 years old?
- These beliefs were created by the things we heard, by what we saw, and by specific incidents we experienced as a child.
- Most of us don’t know why we make the choices we make about money and wealth because they are the result of programs we run in our minds automatically based on the beliefs we learned during those crucial imprint years!
- So for example, if you grew up hearing things like “Money doesn’t grow on trees” or “Money is the root of all evil” or you saw your parents struggle to pay the bills on a monthly basis, then your default reaction to material things might be “I can’t afford that”. This leaves a negative imprint on your psychology because you associate money with feelings of scarcity, pain or even resentment.
- In an industry like trading, where you have to risk capital, regardless of whether you want to make money or not on a logical level, if you truly believe that money is scarce then this will override your logical thoughts and sabotage your ability to follow your plan.
Now that we have covered your relationship with money, we can move on to the concept of your financial thermostat.
What is a Financial Thermostat?
Your financial thermostat is actually very similar to a regular thermostat!
- The thermostat is set to keep your room temperature within a certain range – so the thermostat regulates the temperature automatically and will kick in to ensure it always remains in that pre-set range.
- Think of your financial thermostat as the amount of money that you are comfortable with, the amount that you have set for yourself.
- Let’s say the average American makes $36 k per year, which means that the monthly paycheque would come out to around $3000 – most Americans also live paycheck to paycheck so for example sake, the financial thermostat for an average American would be around $3k on the high end and say $250 on the low end.
- When your bank account rises above your thermostat, let’s say you get a larger bonus than expected, for example, you find a way to blow the cash.
- When your bank account drops below your thermostat, you start to work harder, be more diligent and tighten up expenses to bring it back up.
- If you reflect on your own experiences with money, does this hold true?
- This is why lottery winners usually end up right back where they started after several years – because they never worked on increasing their “default” settings on their financial thermostat.
- The level of your financial thermostat determines the level of your wealth. This level may gradually expand over time but seldom, if ever, does it expand rapidly. The faster it expands, the more volatile you fluctuate between the upper and lower bounds of the range.
- To bring it back to trading, if your money beliefs are such that you associate money with risk, scarcity, and danger, while you logically strive to make more money, can you see how this misalignment can create a conflict between what you think you want and what you actually believe you deserve?
How Does Your Financial Thermostat Manifest Itself in Your Trading?
There are a number of ways that your financial thermostat asserts itself in your trading and these include:
- Position sizing – If you trade positions that make you emotionally uncomfortable, you effectively put yourself in a position where you are too scared to trade because you don’t want to lose money, so you scale back or don’t trade at all. On the flip side of the coin, if you trade too small, then you are not as engaged emotionally and this can lead to sloppy executions and straying away from your plan because the monetary rewards simply do not motivate you.
- Self – Sabotage – you might get to a stage in your journey where you are starting to make money and have built up somewhat of a profit cushion. At this stage, you might be above your current financial thermostat range, and as a result, you self-sabotage by telling yourself that you can take more drawdown now because you have a profit cushion, so you decide to increase the trading size, take on more risk per trade and aim for larger profit targets.
Practical Strategies to Adjust Your Financial Thermostat
The goal of adjusting your financial thermostat is to uncover all of the limiting beliefs living in your head that are hindering your prosperity and challenging them so that they no longer affect you!
- The first step is awareness – whenever a situation involving money comes up, take a moment to observe these thoughts as a third party (literally see yourself outside of your body seeing observing these thoughts) and become aware of what you are thinking and/or feeling. When you think about the material things you desire, what kinds of feelings come up? Do you feel like you deserve these things? By becoming aware of these thoughts, you allow yourself to identify where your financial thermostat is currently set.
- The next step is to change how you speak to yourself once you become aware of the thoughts you are having! If you believe that you don’t deserve something, then challenge that belief! Ask yourself why you believe that or a personal favorite, “Why are you arguing for your limitations?”. Remember that limiting beliefs are deeply ingrained and while on the surface they seem like they might be against you; they are really there to protect you. Your money thermometer might be set really low without your knowledge because your relationship with money might be that of disappointment or resentment, so your brain will try to protect you because it saw that money always brought you pain in the past. The next time you have a positive experience with money, reinforce it by using positive self-talk!
- The final step is visualization – Use a vision board to make compelling pictures of wealth and income, or of material goods that represent wealth. Take a few minutes every day in a quiet place to visualize your desires and how grateful you are for possessing them! Get very detailed here and don’t be shy! If you want to make a million dollars trading, visualize seeing that balance in your brokerage statement. What would that feel like? What would you do with that money? Visualize all of these things in great detail until it feels real! You are now in the process of shaking out the values that don’t serve you and replacing them with those that will!
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- Catch up with our earlier episodes: Mind Over Markets Podcast
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