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Psychological Risk Management

  
Analysis, Education
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  • If you’re out of balance, you’re going to make bad decisions, and trading the market is a decision game
    • If you’re overtrading, you’re out of balance
    • If you’re overcommited, you’re out of balance.
    • If your dollar risk is too high, you’re out of balance.
    • If you’re hung over, you’re out of balance.
    • If you’re sick, you’re out of balance.
    • If you need the money, you’re out of balance.
    • If you make too much money, you’re out of balance.
    • You’ve got to take time off. You can’t trade every day.
  • Pay more attention when you account size gets bigger
    • I’ve noticed over the years that when my account has been small for whatever reason, I have been really careful with it. I watch it like a hawk. When my account gets rich, I tend to fall into a habit of neglect. I’m making money. I have profits, and I’m more comfortable. I don’t keep as close an eye on it. That’s very foolish.
  • Take profits out of your account
    • You should spend some profits rather than letting the money stay in your account indefinitely. That’s been important to me over the years. I withdraw money from time to time and take a vacation or buy a new car. From a behaviorist’s standpoint, it gives a sense of reward. It provides conscious and subconscious motivation.

Put Trading First, Be There Day In and Day Out

  
Analysis, Education
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  • Consistency is your willingness to put trading first in your life so you’re online day in and day out, trading your system to maximize the odds that it will work for you when the market is moving.
  • When traders take a break for whatever reason — because they want to play, because they have experienced a series of losses, because of complications in their personal lives, or because the market is dead — they end up missing moves that could have resulted in hefty profits.
  • That doesn’t mean you always have to trade, but you should always be there to follow the markets.
  • It’s very easy once you’re self-employed and trading to excuse yourself for all kinds of reasons. This can prove to be a devastating mistake. You will find over time that those days you take off to play golf or go fishing or whatever will inevitably be the days when the two or three trades you’ve been waiting for are triggered. These trades would have made your month very profitable. Then you have to scramble for the rest of the month. When you trade this way, you tend to lose money. Inconsistency does not pay off.

Trade on Intuition, Not Impulse

  
Analysis, Education
  • If you do your homework, you will develop a sense of intuition regarding the market. Intuition evolves from a foundation of long hours of study and work. It wells up from a long period of successful experience, thoughtful research, reflection, and wrestling with ideas, concepts, and markets.
  • Traders who trade on impulse are usually ungrounded, very excitable, emotional, and often wrong about their trading decisions. Impulsive traders tend to get carried away by greed and fear.
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