Emotions Impact Your Trading: How To Trade Stress-Free
Imaging the following trade sequence: after a thorough analysis of the markets and defining an entry point and potential exits
(i.e. stop loss and take profit), you open a trade. However, soon after entering the position,
you get nervous and despite price being far from the earlier defined exits, you close the trade with a small gain.
Not long thereafter, prices moves further in the right direction and once more you curse yourself for a lack of patience.
You promise yourself to be more patient, but guess what? Next time your position slides a bit in the red and you close with a small loss,
just before a big turnaround… Sounds familiar? I’ve been there often, until I found a way out of this mess.
Trading is dealing with uncertainty. No one can predict the future. After opening a position, you will be at the mercy of future developments.
Accept that you don’t control the direction of the market. However, be aware that the lack of control on price movements and hence a widely
unknown outcome of your trade, creates anxiety. True, you might have control of the boundaries of the potential outcome by setting a stop loss
and take profit. But a lot of doubt may arise after a trader opens a position. Will I book a profit, or might I suffer a loss, is my stop loss
not too far, or too tight, am I too greedy with my profit goal, did I interpret the indicators correctly, is that a resistance on the hourly chart…
Furthermore, as time passes, impatience will likely follow. When the trade moves slightly in the right direction, the trader might find some relief
from fear of losses, but instead may be confronted with thoughts about being too greedy and might decide not to let the profits run. Other way around,
when price moves unfavorable, frustration might slowly arise and hamper neutral decision making. Although it’s hard to eliminate these feelings,
traders can find ways to minimize the stress they cause.
Fear of loss is one of the drivers behind above mentioned anxious feelings and is a big concern within the traders mind. Fear of being confronted
with a major loss goes hand in hand with the size of your position. The larger the position, the greater your anxiety and stress being in the markets.
So how to reduce this cause of stress? Set your position size at a level where you don’t feel a potential loss as a threat to your trading career.
Adjust to a size where you feel comfortable being in the market with an open position. You might have your own level of risk aversion, but a rough
guideline may be risking a maximum of 1% of your trading capital. So with a trading capital of $10,000 you might chose to have a maximum risk i.e.
loss of $100. Note: your maximum risk is not the same as position size! For instance, you might buy 50 stocks of $20 each (= $1,000) but set a stop
loss at 10% or $18 (50 times $ 2 = $100). If you think that 1% risk acceptance doesn’t encourage you to take the right decision, increase the risk to 2%.
On the other end, if 1% is too much stress for you, decrease the level to 0.5%.
In Charge Of Your Trading
As long as market prices move, the outcome of your trading stays uncertain. You have control of your trading plan. Accept the unpredictability of the
markets, but stay in charge of your decisions. Set your position size at a proper level and minimize your stress for a successful trading career.