Successful traders understand the importance psychology and how reacting to risk is one of the most crucial aspects of success in the market. As with anything we do in life, confidence is a significant aspect of achievement.
What leads to confidence? A well-thought-out game plan that covers all of the essential parts of trading. You wouldn’t travel the world without a map, why would you navigate the markets without a trading plan?
A solid trading plan should cover your goals, markets you seek to trade, timeframes and measuring performance. Risk management is also important to your trading plan.
How should a trader define risk? Risk is the possibility of losing your original investment. How should a trader determine how much to invest? By determining what they’re willing to lose.
Investors must be willing to lose all of their risk capital. While young investors can have a significant proportion of risk capital because they have a longer time horizon; retirees are usually not comfortable with a large proportion of risk capital in their portfolio.
After defining your risk capital, apply common risk-management tools such as stop loss orders. But remember, no tool completely eliminates trading risk.
Focus on the process, NOT the results. Easier said than done, right? One of hardest aspects to trading is not thinking about the outcome, both the losses and profits. It takes patience, but over time with a pointed effort you can build the discipline to only focus on the aspects of trading which lead to the results, win or lose.
One method to help with staying focused on the process, is to use a checklist prior to entering a trade:
- What is my logic for entering the trade, and does it fit within my trading plan?
- Where will I place my stop and target, does it allow for a good risk/reward?
- Am I willing to accept a loss on this trade, and the risk associated with it?
- Is this a trade I would take 10 out of 10 times?
You need to be able to answer “YES” to these questions. The success of a trade should not be solely defined by what is in the profit and loss column.
Learn more by downloading our free trading guide Building Confidence in Trading.