One of the most important skills to master if you want to make money over time in the markets is managing your emotions.
Looking for advice for the rookie trader that I am.
I entered a QQQ trade. When I was down 30% on the trade, I was worried… So I closed it for a loss… Of course, I’ve been watching QQQ like a hawk, and seeing it reach a 65% gain 60 minutes ago, I am absolutely furious with myself.
How can I manage those emotions? I asked myself, “Am I OK with losing $350–400 if this goes to zero?” And the reply I got was no. So I closed it.
But I was very wrong, as there is at least a 65% gain now.
This is the struggle every trader goes through. Trading is about far more than watching charts. It’s also about keeping your emotions in check.
When you’ve got a big gain in hand, it’s far too easy to get blinded by greed.
And when you’re staring at a loss, it’s difficult to avoid fear and anxiety.
So today, let’s look at how you can control your emotions when you’re in a trade…
Emotions can get the best of you if you’re trading more than you can afford to lose.
This number will look different for everyone. Some people are comfortable risking $5,000 or more on a single trade. Others feel their heart flutter at the thought of losing even $100. The important thing is to be OK if the trade doesn’t go your way.
One way to know this is by not risking too much on any one trade. I recommend you only risk a certain percentage of your account on each trade.
Start with 2–3% of the money you’ve set aside for trading. If that’s $10,000, that means putting just $200–300 into each trade.
The great thing about choosing a percentage over a fixed dollar amount is that your position sizes will grow along with your account.
Say you profit on several trades and grow your trading account to $11,000. Your 2-3% position size is now $220–330.
By choosing a small percentage of your account size, you won’t blow yourself up on a single trade. And you naturally risk more as you get more confident.
That leads me to my next suggestion…
Another way to keep emotions out is to think of your trades in terms of both risk and reward.
Only thinking about the reward side of the equation – that a trade could pay off a loan or cover your next vacation, for example – will attach too much emotion to it. You’ll be tempted to hold on to that trade… no matter how deep underwater it goes.
Instead, decide when you’re going to exit a trade before you enter it.
You might use a stop loss – a limit you set where you’ll close out your position. It may be a stop loss with a fixed dollar or percentage amount. Or it could be a trailing stop that rises a fixed percentage behind the trade (but never moves back lower). I’ve shared some advice here on one way you can set stop losses.
Rest assured, when I issue a trade, I’ll always let you know whenever it’s time to exit a position.
Whichever method you use, just make sure to decide before entering the trade, so you don’t have to evaluate your options right when you’re in the thick of a trading conundrum.
Then stick with your decision. The moment you start second-guessing yourself, you’re going to be vulnerable to your emotions and get into trouble.
Enter your trade based on good analysis, and close out of your position using a predefined exit strategy.
That way, no matter if you win or lose, emotion never gets a seat at the table.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. If you haven’t watched my 5-minute IPO profits briefing yet, there’s only a short time to catch the replay.
I shared why buying IPOs right away tends to be a trap… and my strategy for what you can do instead to bring in hundreds or thousands of dollars that same day.
Watch here now before the replay goes offline.
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