Trading is an emotional business. You are putting your money at risk based on your opinion of which way a market will move. You are either right or you’re wrong. For every trade you take, someone is on the other side of the trade trying to take you down.
If you are new to trading, then fear is natural, but it doesn't have to remain that way. The more you study markets, and apply strong money management skills, the more relaxed you will likely become.
Many trading psychologists share a pyramid that depicts the 3 components of trading:
• 10% – Trading Strategy
• 30% – Money Management
• 60% – Trading Psychology
Let's take a quick look at each of these components:
Trading Strategy (10%)
Having reliable trading strategy is very important, but how do you know if it's reliable? Did you just take someone's word for the strategy and start trading in your live account? Or did you study the precise rules of the strategy, and practice it in demo until you had mastered the entry and exit rules? Did you log your results and compile stats to determine probabilities of success? Having a reliable strategy is important, and you need to understand how it works as well as your probability of success. Otherwise, you don't really have an edge, and you're probably guessing.
Money Management (30%)
If you know the probability of success for a trading strategy because you've proven it to yourself, are you putting less money at risk than your probability of success? For example, if a strategy has a recent 80% proven probability of success, are you risking $70 or less per contract? If you are, then you are likely to see your account grow.
Are you risking 5% or less of your account balance on every trade? If you are, then losses aren't catastrophic. Losses will happen in trading, but they are far more painful if the amount of money you have at risk on a trade is a substantial percent of your account balance.
Are you protecting yourself against catastrophic loss? With both the Nadex binaries and spreads, you always know what your maximum risk is on every trade, it is limited to your initial cost. Trades can't run away from you. Unlike other leveraged instruments, you can never lose more than you decide to put up at risk.
Finally, are you trading risk capital? Risk capital is money that you can afford to lose without impacting your lifestyle. It is separate from your savings and the money you need to meet your monthly obligations. It's that money that you found under your mattress or has been languishing in a dormant account. You almost forgot you had it.
However, if you are trading a small account and risking 20%-50% of your account balance in order to make the rent, then trading can be highly stressful.
Trading Psychology (60%)
If you've done your homework, studied diligently and found a reliable trading strategy, then your mind can be at ease when you enter a trade. If you manage your risk capital responsibly, and only expose a small fraction of your account to risk, then you can breathe easier if a trade moves against you. And it will happen.
Consider your state of mind when you trade. It's very important. Do you feel alert and awake when you are trading, or are you tired and distracted? Are you patient and relaxed or are you bored and fidgety? Do you place trades only when the precise rules of a trade are satisfied, or are you just winging it, and looking for action? Win or lose, do you know when to walk away from trading for the day, or are you inclined to revenge-trade after a loss or over-trade because you think you are on a winning streak?
Trading success depends on having reliable strategies, sound money management, and most importantly – a confident and relaxed state of mind. If you can balance these elements, then you can take fear out of trading.
Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results.
Posted-In: Markets Trading Ideas General
© 2016 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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