Can you take the heat of your trading method?

If you can’t take the heat get out of the kitchen.

This familiar saying applies to trading. While you are reading about trading in books and online you will feel a sense of confidence grow. You will study charts and they will look so obvious, of course, there is the support, the resistance, and the unmistakable break out, so obvious. Your study of the greatest stocks of all time will make you believe that you would have realized in real time that the iPod was going to take over the music business and knock out all competitors and Google would triple, it seems so obvious.

Unfortunately as you get to the right edge of a real time chart a mysterious thing happens, it is invisible. Future charts do not look as clear in real time as they did in hindsight. You do not know the outcome, real money is at risk, your ego is at risk of being wrong. Suddenly these strange emotions well up in you called greed and fear. It is not as easy as it looked, you feel the heat of risk.

There are a few ways to combat these feelings.

  • Trade a stock or ETF you feel very comfortable with, you know the average daily range and volatility, or you believe in the company’s business.
  • Trade a system and method you believe in, one you have back tested enough that is a historical winner in the long term.
  • Carefully control position size to limit your risk exposure.
  • Control your money at risk, 1% of total account equity is a good place to start. (If you have a $25,000 account risk $250 per trade with your stop loss)
  • Trade a methodology you believe in, if you believe in trends, trend follow, if you believe in buying cheap, swing trade buying off support. etc.

If you hope to make it from a new trader to a rich trader then you have to control the heat you take so you stay in the game and not get burned out.

Leave a Comment

Your email address will not be published. Required fields are marked *