A mind once stretched by a new idea never regains its original dimension.
– Oliver Wendell Holmes
It’s a Monday and Bill is annoyed with himself for making a loss last week of $2,000 on one trade. Obviously he should just get on with the trading for the week and let it go and he knows it but he can’t help thinking of the money and what a difference it would have made. The credit card bill, the vacation, the new roof, and the special treats he was hoping for etc.
These thoughts increase the sense of loss and pain and make it all personal. Indeed it is easy for this to take over when you are a trader as it really is your own money that is being lost when trades don’t work out as planned. However this can lead to paralysis in committing to trades and so losses must just be seen as being an operational cost of being a trader.
Money is so intertwined to the fabric of society that most people view it as a measure of themselves and are unable to detach themselves emotionally. After all money is what is needed to purchase the basic necessities of life as well as the marks of success such as cars, vacations and the latest gadgets.
It is this that can then dictate someone’s self-esteem. Become emotionally attached to it and out goes the clarity of thinking and focus required to trade successfully, especially if losses mount up.
So how is it possible to become emotionally detached from the money? One method is to make a distinction between the money in personal accounts versus the money within a trading account. The money for personal living needs to be treated with respect to ensure all obligations are met and ensure life is as relaxed as possible.
The other is to view losses in percentage terms, then the thought of what a loss could have bought is less likely and abstract.
The money in the trading account needs to be viewed for what it is, working capital that funds the business of trading. Expenses include not only the direct costs of trading such as the purchase and running of equipment, data feeds and trading fees but also operational losses.
Objectivity is essential when trading. The real issue is how to maintain it when things go off plan. Often it is said that the objectivity goes when a trade is initiated and theory turns to reality with the risk of loss and the uncertainty of profit.
Typically the rule is never to put more than x percent on any one trade. The percentage can change and increase as the trader becomes more experienced. The other element of the best strategy is to always manage the risk level with a realistic level built into whatever trading strategy is chosen.
When you trade and you have to worry about every cent committed as an essential you get it all back, then your mind is never going to be able to be detached enough to analyse the best exit point if the markets starts going against you. So step back, remember it’s a business of which losses are an inevitable part of trading success and only look at the numbers in abstract terms or as a percentage. Never think of the money in terms of what it will buy in your personal life but only in terms of the operational costs of the business.
If need be, make the numbers always stated in percentage terms so that even if one trade fails to deliver the expect gain it is clear that it is not critical to the business and your life.
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