Psychology of Risk Control
The mind is a powerful piece of the puzzle in our quest for financial success. There are times when we can be our own worst enemy. Missed opportunities, poor choices, and angry rebellion at the market can all create disaster. And it is working on the underlying psychology that drives our trading and investing choices that can be the magic key that helps us break through stagnant or nonexistent profits. Here you will see what issues to look for and how to address them in order to more effectively implement your money management system.
Stop-Loss Exits
If I had a nickel for every time a trader e-mailed me about losing large sums of money and not having a stop-loss exit in place-well, I’d have a lot of nickels! In any event, sometimes it isn’t that an individual doesn’t know they need a stop-loss exit in place; instead it’s that they don’t know how to effectively choose one. Or, they choose one and then don’t adhere to it for psychological reasons.
Trade Size Does Matter
Are you trading the same exact number of shares on every trade every time, without examining the current market dynamics? It is neat and tidy to have a nice round number of shares or contracts (100 or 1000), but it might not be in your best interest to do so. The concern is that you may be taking on too much risk for certain market conditions.
Record Keeping and Profit/Loss Analysis
Record keeping may not be your favorite pastime, but it is crucial and will pay you significant dividends down the road. If you truly detest the practice of tallying up your profits and losses, that may be a reflection of you hiding from your results. This brings us back to the psychology of money management. Many emotions can be generated by the simple process of adding up the numbers.
This process can commonly generate fear. Fear of success (yes, it is common to be fearful when you are actually successful at something like trading), and fear of failure can be all too familiar.
Now is when you need to gather every molecule of discipline you have and start running the numbers. This doesn’t mean waiting until the end of the month and getting your calculator out. It means every day, tally up the numbers. It’s the only way to stay honest and accountable.
Design Your Own Plan
You get to customize your own plan to fit your risk tolerance, your experience level, and your financial needs. You'll walk through the money management techniques at your disposal and will help you to design a realistic plan. This plan is one that you will continue to use and profit from.
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