Once you’ve mastered putting in protective stops, you’ll feel empowered. Why? Because at that point you are emotionally balanced and are WILLING to transfer the risk to someone else and exit with a small loss. You have emotional and financial understanding that trading is a process and that any one trade is meaningless over 1,000s of trades.
At that point you have personal power in that trading is just one part of your day and your life is abundant. And you don’t need to tell anyone about your trading. You’re in love with your process – be it mechanical or discretionary – and not in love with any one particular trade.
At that point, you’ll also realize that you can’t really speak to anyone about trading anymore. Most amateurs don’t understand that trading like a professional requires a combination of self-awareness, emotional intelligence, and some level of technical proficiency.
You won’t be able to communicate with such a person as they are speaking one language and you another. They are ignorant about your expertise and necessary behavior. It’s a dialect all its own and it’s unique to you and only you.
This ability is learned behavior – but most will never achieve this level because they are focused on the wrong principles. They’re missing the 80% of the puzzle that is most significant.
One book that I frequently recommend is Justin Mamis’ The Nature of Risk: Stock Market Survival and the Meaning of Life (1). I believe this book to be foundational to new traders because it discusses, what else?, the nature of risk in the market. What I love about Mamis’ book is the unique way that he writes about market risk, and the way that he juxtaposes two seemingly opposing ideas, that are not in opposition at all. From that juxtaposition he illuminates. (Read on for an example). Given some of the conversation at the Slope, I wanted to do a brief post on some of his concepts from Chapter 6, The Emotions of Risk. I think that some will find some resonance. I particularly wanted to share some of these concepts that might engage your brain into thinking about risk differently. Mamis posits: “Under pressure, emotions determine our action.” (p. 72) Because risk is typically defined as a peril, fear is one of the primary emotions. “Fear is long-term, an underlying pervasive emotion, like the underlying primary trend of a bear market. It doesn’t go away until it changes.” (p.73) Mamis makes a simple, yet powerful, statement about the pervasive fear needed for stocks to go up. Yes, you read that…to go up. For there to be buyers, there must be sellers. And it is the fear of the sellers that creates the proverbial wall of worry to provide supply for those who have a different perception of current market risk. He also notes that the operative portion of fear is anxiety. Anxiety is what paralyzes and prevents you from taking action. It is this anxiety that “gets in the way of taking a risk.” The flip side of fear is the emotion of greed. The operative emotion of greed is envy. Mamis notes that “. . . whereas anxiety paralyzes, envy cause one to act. . . ” It is difficult to see the spectacular trades/success of others, and not feel a small bite from that evil twin of jealousy, envy. Envy can cause very risk behavior which is simply, “the risk of ‘denial of risk’.” Both greed and anxiety often lead to doing the wrong thing. My sense of this wrong thing is “inertia.” : failing to buy when one should buy; failing to sell when one should sell. These emotions and their operative manifestations into our action (or inaction) govern all market participants. The emotional impetus for buyers/sellers is reversed in bear/bull markets. Regardless of the market participant regalia you dress in each day, it is best to understand both your own and others’ motivations and perceptions of the current risk environment. Mamis’ book came along for me when I was feeling ‘inertia’–that inertia having been brought about by the overwhelming need to have more information, more certainty, more sense of direction. Granted, there is nothing wrong in standing aside when there is great murkiness…but my inertia was spanning a time when there was some market direction, but my emotional state prevented my seeing that. Providence must have set this book into my hands, because it helped me come to terms with that inertia. As market participants, we have to balance the two opposing points off view of being free enough to take risk and while not falling into the trap of ‘the risk of ‘denial of risk.’ 
Desire and fear alternate in the minds of traders as they go through the day. But let me ask you whether desire or fear dominates your thoughts and feelings as you trade? 
As traders, fear and greed are the two emotions that we commonly handle in our trading decisions.
Losing trades can have the same affect – if you let them. However, if you look at each trade as just one of your next 100 or even one of the next 1000 trades you’ll make in the next year, you’ll begin to attach far less emotion to the outcome of each trade. Detaching emotion from individual trades is one of the best ways to build confidence in yourself and your long-term success as a trader.
1) What goes up must come down and vice versa.