Thursday, September 8, 2011

Tips for Improving Your Trading Psychology, Part II


This sounds completely counter-intuitive considering the whole reason we trade is to make money. But you won't achieve greater results until you stop thinking about money. I've found this is a tough one for most people at times, myself included. When traders focus on the outcome of making money (or losing it) instead of the process behind it, it activates the greed-and-fear emotional centers of the mind.

I used to literally shake in anticipation when I placed a trade; partly out of fear of losing my hard-earned savings, partly thinking about getting rich quickly. I also risked way too much money on each trade. It put me in a tense mood for as long as I was in a position. Throughout the day, I would check the second-by-second changes on the 5-minute chart much like a bad baker keeps opening up the oven to make sure his cake isn't burning. I wouldn't give my trades a chance to work because I kept alternating between fear and greed. All perspective and rationale went out the window. Swing trades turned into day trades.

The way I combated this was three-fold:

A. I reduced the amount I risked on any one trade to 1-2%. If I was wrong, it was not enough of a loss to destroy my confidence or shake my nerves.

B. I dedicated myself to proper research with targeted entries and exits. Preparation fights fear and greed.

C. I mentally prepared myself to lose that 1-2% but not a penny more and, in fact, traded like it was already as good as gone. I told myself that if I made money it was just a bonus.. The end result was it completely dampered the greed factor by keeping my expectations realistic and it forced me to stay vigilant by never lowering my stop losses, thus taking fear out of the equation as well.

Now when I move in and out of a position, money is the furthest thing from my mind. I am merely focusing on my art. Do this and money is much more likely to follow.

Part III coming soon.

No comments:

Post a Comment