Have you ever lost big on a few trades and thought, “I need to win it all back right now”? When this happens, your emotions start to take hold. You may even start thinking about seeking “revenge on the markets,” but such overly emotional responses have no place in trading. It is useful to cultivate a more objective, unemotional approach when trading the markets.
Emotions and money often go hand in hand, and our feelings toward money often bleed into our trading lives. For example, have you ever compared how it feels to spend cash to pay all expenses rather than credit cards? When you pay expenses with credit cards, it’s easy to forget you are spending real money. The money can start to lose some of its meaning. It sort seems like spending play money. Doling out the actual cash with each purchase, in contrast, makes you see exactly how much money is being spent.
You feel differently about it. Spending actual money raises your awareness. The money is less abstract and tangible. It’s easier to spend. Although treating money so cavalierly can lead to problems with spending in everyday life, such an attitude toward money can be useful when trading. It allows you to look at the money as objectively and abstractly as possible, just as percentage points or ticks. It eases some of the pressure and helps you get up quickly after a setback knocks you down.
There are a few simple things you can do to maintain an objective view of trading capital. Many say that when money is committed to trade and the risk and potential loss is experienced, “objectivity goes out the window.” Thus, anything you can do to minimize the feeling of risk and potential loss will help you look at the markets more objectively. First, it’s helpful to trade with money you can afford to lose. Trading is a profession where you should go in expecting to lose. If you can’t afford to lose the money you trade, it will be difficult to maintain objectivity.
Deep down, you will know that you just can’t afford to lose in a worst-case scenario. Feelings of uncertainty and fear will gnaw at you. Second, it is also crucial to managing your risk. By carefully managing risk on any single trade, you call tell yourself, “I’ve got little to worry about. I can afford to take the loss.” At first, you may have to consciously remind yourself of this fact (again, make sure it is a fact), but over time it will automatically be in the back of your mind. You will be calmer, and can more easily cultivate an objective mindset.
Finally, view profits and losses in an abstract framework. Rather than focusing on concrete dollar amounts, try to focus on percentages, or just abstract, theoretical numbers. Don’t think of the dollar amounts in terms of what can be purchased. Equating dollar amounts in terms of tangible terms, such as car payments or sought-after luxury items, will weaken your objective mindset. You’ll be more prone to experience elation from big wins and disappointment from losses. So don’t let emotions get the better of you. Cultivate an objective mindset. You’ll trade more calmly, creatively, and profitably.