Many traders, both new and experienced, can become overwhelmed with anxiety when trading. It can be tempting to rush into a trade, seeking the thrill and excitement of the market. This unguided enthusiasm is similar to the feeling of visiting a casino, game room or amusement park. The euphoria of trading can be all-consuming, and the more you trade this way, the more likely you are to fail. It is important to remember that trading should be treated as a business, not as a hobby or a way to gain emotional satisfaction.
Emotions can cloud your judgement, and every time you adjust a trade while in it, your chances of being right are halved. If you make two changes, your odds are reduced to one quarter. If you make three changes, your odds are reduced to one eighth. You get the idea.
When you in a reactive mode, the odds are building against you exponentially. You can avoid being in a reactive mode by planning the trade and trading the plan. You need to answer three simple questions:
- Where is the trade entry? One needs to determine a precise entry point to take the trade.
- Where do I place the stop? What if the trade does not react as planned? At what point will you concede and take your loss versus not having a stop and potentially creating a much larger loss. You MUST determine the dollar amount you are willing to lose BEFORE you enter AND share size accordingly.
- What is the trade target? The target should yield a risk/reward ratio that you are comfortable with.
Once your entry, stop and target are determined you can enter the trade and when you are in the trade, it’s just a matter of following the rules you set forth in your trading plan to manage the trade.
By trading in this disciplined manner, you are proactively making decisions rather than reacting to the market. This business-like approach reduces the emotional rollercoaster of trading and allows you to make logical, methodical decisions, just like you would in any other business. This is the only way to approach trading if you want to be successful.
If you have a passion for trading or would like to find out if you do, consider joining the group and let’s take your trading journey together.
More information about the group can be found at the following link: https://livetraders.com/groups/detail/2b144965-1248-4117-a8e0-be3f70c5725d
