A Little Extra Protection Goes a Long Way
It is a muggy day and Skip can’t seem to do anything right. He has fumbled around all morning. He didn’t sleep well last night. He's tired, and he is tempted to just quit for the day, drink a few tequilas, and sit in a hammock by the pool. But he still has enough willpower to fight temptation a little longer. He has been working on a trading plan for the past month and he wants to see it through. Today's market conditions are just right. He wants to execute the trade today, a day he has patiently been waiting for the whole month. It’s a day like today that Skip is glad that he has prepared beforehand for what could go wrong. He may not be at the top of his game at the moment, but he knows that he can survive a worst-case scenario should it happen. He has taken precautions and knows deep down that he can live through a major setback. So even though it is a tough day, he’s decided to stick with his plan, execute it, and see if he can take home a profit.
When it comes to mastering your psychology, feeling safe and protected can do wonders. If you are truly afraid of making a mistake, you will not feel calm and relaxed. You’ll be on the verge of making a trading error. And when you are under extreme pressure to perform flawlessly, you feel it. There’s an old trading adage that is apt to trading in the calm, calculating state of mind: Make the trade so insignificant in the big scheme of things that you wonder why you are even bothering executing it. Managing your risk is the key to cultivating an unwavering, psychological sense of safety and security. If a trade requires you to risk only a relatively small percentage of your account balance, you’ll feel at ease. You’ll know that you can survive a setback, and you’ll think, “What do I really have to lose? I can relax a little and see what happens.”
There are other obvious ways to feel protected and safe. For example, you can use a protective stop to make sure that you restrict the amount you can lose on any given trade. Look at the past performance of a stock and estimate an ideal stop loss point that protects you, but does not allow you to get "stopped out" too early. Once you've determined an optimal stop-loss point, use the automatic settings on your trading platform to ensure that you are protected even when your self-discipline fails you. Perhaps the most important form of protection, though, comes in the form of a well-developed trading plan. If you know specifically when to enter and when to exit, you can execute the plan even while feeling a little stressed out. You can mechanically follow your plan, focusing on your immediate experience rather than the long-term consequences of a trading loss. It's also important to anticipate adverse events as part of your trading plan. Make sure that earning reports or a Federal Reserve announcement isn't going to ruin your trading plan. Careful and precise planning is the best way to protect your account balance.
Just like engaging in a dangerous sport, you feel better when you know that you have some form of protection. Athletes protect themselves with helmets, and airbags and seatbelts protect us as we drive in rush hour traffic. Successful trading also requires adequate protection. Protection not only ensures that you can survive to trade another day, but it also allows you to feel relaxed while you execute and monitor a trade. So protect yourself. If anything can go wrong, it usually does. You don’t have to worry, however. If you take precautions, you’ll survive the inherent setbacks in trading, and end up winning in the long run.