One of the most overlooked and misunderstood areas of trading is the psychology of trading. I am a firm believer that once a trader has a firm grip on their “psychological being” that the daily trade entires and exits, and the significance of any individual wins and losses soon disappear into the sunset – as the larger picture (ie…making a living at this!) begins to take shape.
One of the absolutely most effective ways to “harness the demon” and wrangle those emotions – is to trade small.
I’m not talking “kinda small” either like……you still go to bed the night of the trade with a lump in your chest ( all be it a touch smaller than the night before ) and your heart is still beating like a rabbit ( as opposed to a hummingbird ) I’m talking “super small”. Focus on your emotions for a week, and completely disregard any idea of “getting rich” or even that of making any money at all – and consider the following:
Would you rather trade a single (micro) contract with a full 200 pip stop (essentially risking $200.00), and wake up in the morning to see that:
- You are still in the trade ( and have not been stopped out ) – as the 200 pips has afforded you some breathing room when things are volatile.
- You are a “teeny tiny” ways into profit, with the option to close the trade – or perhaps tighten your stop and let things develop further.
- You are a considerable ways into profit. Woohoo!
- You are a fraction in the “red” and see that your current account balance is down a mere 30 – 50 dollars, and that perhaps news has broken – or something fundamental has shifted, and have option to reassess, close or add .
You traded a full 10 contracts with a 20 pip stop ( again risking the exact same amount of money ) and wake up in the morning to see :
- Of course you’ve been stopped out without even giving the trade a single day to develop / move learn more about the markets direction, no option to add to the position, no idea of what news may have effected further decision-making and……down -200 smackers.
The smaller trade ( regardless of its immediate outcome ) has afforded you a much better sleep, less chance of heart attack, a myriad of further trading options and some very important insight into your trading by allowing you to watch it develop – and just as much likelihood of profit!
Take a full week and take your position size down to near “0”, observe market action in real-time, and you will learn plenty……….not to mention sleep much better.
And hey…”news flash” – you didn’t get rich this week either! – Surprise! Surprise! – Get it?