This week I’m wrapping up the discussion around capital preservation by talking about the psychological impact of losing money. It’s difficult to quantify the psychological impact since each trader reacts differently to losing x percent. Which is why I stress that emotionally, you should be completely comfortable with the risk you take when you trade.
Tell us about some of your struggles or accomplishments when it comes to how you deal with capital preservation. Your comments help us all… post your message below!
Hi… Norman Hallett here with your next 4 Minute Drill for Traders.
I’d like to rap up our discussion on capital preservation with arguably THE most important issue surrounding capital preservation…
… and that is that we need to consider the PSYCHOLOGICAL impact of losing money.
Unlike most of the other techniques we’ve been discussing, this one CAN’T be quantified.
Obviously, no one likes to lose money. However, each individual trader reacts differently.
You must honestly ask yourself, “What would happen if I lose ‘X’ percent?
Would it have a material effect on my lifestyle, my family, my mental well-being?
You should be willing to accept the consequences of being stopped out on any and all of your trades. Emotionally, you should be completely comfortable with the risk you are taking.
I talk a lot about maintaining your positive expectancy when you trade… meaning you want to be always LOOKING FORWARD to a positive long-term outcome.
Losses along the way are just that… losses along the way to an overall positive outcome. Your trading will ALWAYS be a mixture of winning and losing trades.
And when I ask you to ask the question, “What happens if I lose X%?”… would it change my lifestyle?… I want to make sure that you are in balance.
You want to have a strong trading infrastructure and that means being adequately capitalized and then taking appropriate risks-per-trade.
You want to stay in balance… and by staying in balance you can trade with ease and with confidence and keep that strong positive expectance.
If you’re taking too much risk with respect to the size of your account, you start off the trade with concern… which leads to fear… which leads to making the wrong decisions when you trade.
Don’l let this happen to YOU.
If you’re undercapitalized, find smaller contracts or shorter time frames to trade so your risk fits properly with the size of your account.
And if you can’t do that… you really should stop trading until you can.
Your successful long-term trading depends largely on understanding the ways to identify and control risk.
It’s not about timing the big moves or geeing a home run hitter. That will come along the way.
It’s about risking a small percentage on any trade and keeping total risk exposure within pre-determined limits.
YOU CAN DO THIS! and why?
Because you’re The Disciplined Trader.
Feel free to leave your comments about your experiences with capital preservation or you just may want to comment on what we just covered.
Don’t be shy… we’re in this together.
So… Until Next time…
Category: 4-Minute Drill for Traders