Common wisdom (which actually isn’t so common) preaches to limit your losses… cut and run early. Much easier said than done. Let’s accept that the Commodity, Stock or Forex trading game is not so much an actual functioning reality as much as a virtual game of wits tempered with a good measure of psychology.
All your hard working efforts analyzing your trade setup is an exercise in both discipline AND technical study. Psychology comes into the picture when your prep work gets married to the stock or commodity chart. Your emotions take over from your brain. Promises made… promises quite often not kept. That can be unnerving to say the least.
Commitment has to override doubt. How else can you confidently pull the trigger! It takes balls (no offense to lady traders) to put your money on the line. The devil is on the other side of that glass computer monitor.
No matter how smart you think you are, you can’t possibly have enough information to OUT smart the brightest traders on the floor. When I used to get into trouble trading the New York Board of Trade (Coffee, Sugar, Cocoa, O.J. and Cotton) my local broker would use the squawk box to call the floor…
“What’s up with that terrible fill? (slippage it’s called). The answer would always be “the ticket got stuck under the trader’s shoe”. No freakin’ wonder they’ve been in business since 1870!
All that to say, you’re NOT in charge of anything once you pull the trigger. Your own emotions now get mixed into the chart pattern. Shaken not stirred. Once you make the commitment, what’s coming at you over the squawk box can send you and your blood pressure right into the stratosphere.
There’s a solution. But you’re not going to like it. Why? Because it’s not sexy.
So let’s reverse the role and think of your trade as courtship. Sad but true. If over 50% of marriages end up in divorce, let’s use those odds to your benefit and apply them in your trading career.
What you want to do is set yourself up with a prenup before you march down the aisle. Take another look at your research. Let’s get the stars out of your eyes. Let’s plan an exit FIRST ahead of all the warm and fuzzies of getting your position filled. Like I said… NOT sexy.
The thinking is simple. Execution not so much. Because it takes discipline!
The object of your affection has to become your exit, not your entry. A well thought out exit will keep your eyes off the lofty but completely unpredictable goals for profit and back on where they belong. Reducing your risk to a predictable and a manageable level.
The easiest way to understand this is to grasp what is so attractive about buying call options. Your risk is known in advance. This fact should NOT be read as an endorsement for buying call options. This fact is only presented to illustrate how knowing your risk going in is one hell of a smart move. It’s how I increased my profit all during the winter while creating my coaching material and trading course.
In options buying (calls OR puts) the risk is finite and known to you in advance. You as the buyer of either the call or put option pay the strike price. That price is the extent of your loss. It has no bearing on your potential win, given that time (Theta) is working against you. Point is… you can’t lose more money than the strike price you paid.
How do you achieve this state of affairs and bliss? Protect your position by selecting your stop loss in advance. Woooh. That’s not fun? That conjures up a lot of negative feelings. Calculate either by dollar amount (foolish) or by chart indicators (smarter) a stop loss BEFORE entry you ask?
Exactly. It’s SO technically simple and let me recommend before placing the order, you do the homework ahead of the entry decision. Take the pressure off yourself. Pre-determine the loss ahead of the entry. Reduce emotion and preserve both your account and your sanity. Double benefit.