Poker, a much loved game of psychology among traders, trains the mind to go ALL IN to call the bluff, so much so that it unknowingly becomes part of one's nature. I find this psychology of taking ALL IN trades in trading, a very common occurrence among newer traders. Every now and then, I am reminded of the times when the feeling of hopelessness creeps in, due to common mistakes made in managing risk. Here's a cheat sheet to mastering trading psychology and risk management.
Foundations of risk and psychology
Don't risk the money that you cannot afford to lose
Always have a trading strategy and a minimum Risk to Reward; Risk 1 dollar to make 2
Don't put all your eggs in one basket. Manage your risk by diversifying your positions in stocks
Always allow yourself room to be wrong. i.e, have a non-negotiable stop loss (and don't negotiate against yourself :-) )
Take profits when the market is favourable. Take what the market gives you. Trying to find the market top leads to more erosion of profits than addition.
Trading on margin and options is very risky. Invest time in learning about this in detail, before investing on margin. Learning is inexpensive. Losing money in the market can be a very expensive pursuit.
This should save you a lot of trouble, but here's a situation that occurs far too often among traders:
THE FEAR OF LOSING A GOOD TRADE. A cautionary tale
Consider this:
The market's in a rally, many of your friends are making money from participating in the move. You feel left out and you jump into the market. Loss begin to creep in and you hold the losses because you believe that you can make a profit before you exit. Further losses creep in. Now your'e certain that this is a short term retrace and your overall view is still correct. Next, a big tank occurs and sets you into panic. But you still hold because some of your friends are still holding their position or you believe that hope is always a good thing and all will be well. But now, doubt has set in and your goal is to get out in a no loss no profit scenario. Next, if your'e lucky, the market gives you a breather and begins the move back toward your price, but you still hold your position because a small uptick gives you the feeling that you might be correct after all. All seems well in the world. Then the big tank occurs, leaving you in a feeling that your spiralling out of control.
Mistakes made and lessons learnt
If you lose a trade, there's always the next one
If you see a trade late, there's always the next one
If you are in a bad trade (you know which ones those are), get out of it, there's always the next one
If the risk is not worth the reward, there's always the next one
If you lose all your money in a trade, there may not be a next one....
In the market, you can always choose to manage your risk. There is never a need to risk all your money in the hopes of being right and winning big. Here, the turtle wins the race :-)
Check out more about trading US markets and Currencies on my page @
www.tradingview.com/u/Anand_Iyza/
# MAY THE FORCE BE WITH YOU #
Foundations of risk and psychology
Don't risk the money that you cannot afford to lose
Always have a trading strategy and a minimum Risk to Reward; Risk 1 dollar to make 2
Don't put all your eggs in one basket. Manage your risk by diversifying your positions in stocks
Always allow yourself room to be wrong. i.e, have a non-negotiable stop loss (and don't negotiate against yourself :-) )
Take profits when the market is favourable. Take what the market gives you. Trying to find the market top leads to more erosion of profits than addition.
Trading on margin and options is very risky. Invest time in learning about this in detail, before investing on margin. Learning is inexpensive. Losing money in the market can be a very expensive pursuit.
This should save you a lot of trouble, but here's a situation that occurs far too often among traders:
THE FEAR OF LOSING A GOOD TRADE. A cautionary tale
Consider this:
The market's in a rally, many of your friends are making money from participating in the move. You feel left out and you jump into the market. Loss begin to creep in and you hold the losses because you believe that you can make a profit before you exit. Further losses creep in. Now your'e certain that this is a short term retrace and your overall view is still correct. Next, a big tank occurs and sets you into panic. But you still hold because some of your friends are still holding their position or you believe that hope is always a good thing and all will be well. But now, doubt has set in and your goal is to get out in a no loss no profit scenario. Next, if your'e lucky, the market gives you a breather and begins the move back toward your price, but you still hold your position because a small uptick gives you the feeling that you might be correct after all. All seems well in the world. Then the big tank occurs, leaving you in a feeling that your spiralling out of control.
Mistakes made and lessons learnt
If you lose a trade, there's always the next one
If you see a trade late, there's always the next one
If you are in a bad trade (you know which ones those are), get out of it, there's always the next one
If the risk is not worth the reward, there's always the next one
If you lose all your money in a trade, there may not be a next one....
In the market, you can always choose to manage your risk. There is never a need to risk all your money in the hopes of being right and winning big. Here, the turtle wins the race :-)
Check out more about trading US markets and Currencies on my page @
www.tradingview.com/u/Anand_Iyza/
# MAY THE FORCE BE WITH YOU #