Humans don’t like taking chances with their money. If given the choice, they would take a sure thing rather than a gamble, even if it meant making relatively little profit. What do you think most people would do, take $100 right now or take a gamble in which they would either receive nothing or $200? Most people would take the $100 but would you? If you trade the markets as a short-term trader, you would be willing to take a risk, but there is still a voice deep down that yearns for a safe, sure bet. And the best way to make it safe is to anticipate all possible adverse events and create a trading plan to let you feel a little safer and a little more relaxed.
How can you cultivate feelings of safety? First, trade with money you can afford to lose. Second, trade positions that are so small that you may think, “What’s the point of even putting on the trade.” If you can minimize the personal significance of a trade, you will feel safer and at ease. With a minimal psychological stake on the line, you have almost nothing to lose, and you’ll feel less pressured. If you make sure that you limit your risk as much as possible, you’ll know it and you will feel safer.
If you lose big on a single trade, it will take many more trades to build your capital back up to the previous level. You know this as a fact and it makes you feel uneasy. If you also know, however, that you’ve taken precautions, you feel better. It’s also essential to learn to cut your losses short. Don’t get stuck in a losing trade. Don’t hope that it will turn around. Just sell the loser quickly. Controlling risk will not only make you feel safe and secure, but it will also ensure your longevity as well.
It’s also important to trade with a detailed trading plan. Before you execute a trade, specify precisely how and when you will enter, the signals that indicate the market may be going against your trade, and how and when you will exit. Many traders feel anxious and uneasy because they don’t carefully plan their trades. They impulsively execute a trade and then think they can develop the plan as they go along.
What usually happens, though, is that they panic easily because they don’t know what to do and when to do it. It’s hard to think on your feet, especially when you are taking risks. A safety net helps you feel better. And a detailed trading plan is one of the best safety nets you can have. The more clearly the plan is laid out, the easier it is to follow. And when the plan is easy to follow, it’s likely that you’ll stick with it. You’ll be disciplined and in control of your emotions and thought processes.
It’s impossible to find stocks that are guaranteed to increase in price, so when we trade, we always carry with us a feeling of uneasiness. We don’t have to let these feelings of uneasiness overwhelm us. By taking precautions, we can feel a little safer, a little surer, and trade a little calmer. And these feelings can make all the difference between winning and losing.