There are emotions in trading. So how do you manage them?
There are two main emotions in trading.
The main emotions in trading that we all have as traders are greed and fear.
Let’s talk about fear first.
Most traders fear that they have a loss, that they lose money.
So, here is how you manage fear as an emotion.
You keep your losses small, because when you keep your losses small, you shouldn’t be afraid of the losses.
One of the rules that I like to use is the 2% rule.
The 2% rule is: never risk more than 2% of your account on any given trade. And let’s think this through.
So, if you have a $10,000 account, it means that you should never risk more than $200 on any given trade.
Now, if you’re afraid to lose $200 when you have a $10,000 account, well, honestly, you shouldn’t be trading. You should be relaxed and say: yeah, $10,000 account… I’m fine risking $200.
Because here’s the other thing…
The next emotion is greed.
And this is where as traders, we want to make the trade that makes a million dollars.
A trade that makes $1,000, $50,000, a trade that makes back all the money that we have lost in the past, right? But it doesn’t work this way.
I like to use the golden rule 1:2
This means, for every $100 that you risk, you’re trying to make $200. Not $800. Not $1,000. For every $200 that you risk, you try to make $400.
Now think about it. If you have a $10,000 account, you risk $200 to make $400, right?
It’s a very systematic approach. And in fact, when you use this approach, you can be wrong half of the time and still make money.
Let me prove it to you.
Let’s say you’re risking $200 on any given trade, and let’s say you’re placing 10 trades… Now out of these 10 trades, 5 of them are losing trades. How much do you lose?
5 times $200 is $1,000, so you lose $1,000. On the other hand, you’re trying to make $400 on your winning trades.
Now 10 trades and 5 losing trades means you also have 5 winning trades. How much do you make on the 5 winning trades? 5 times $400 dollars, because again, you’re risking $200 trying to make $400.
So, if you make 5 times $400, this means that you’re making $2,000.
Let’s do the math.
Half of your trades are losing trades, and on your losing trades, you lose $1,000. But on your winning trades, you make $2,000. How much is left after 10 trades?
Exactly! You still have $1,000 left to trade, right?
The beautiful thing about these principles that I personally have been using is that you risk only 2% of your account on any given trade, and then you try to make twice as much money as you lose.
This is how it became easy for me to manage my emotions because these days…
I know exactly where to exit even before I enter.
Right now I’m in CRC and SLCA. I already have my profit target and my stop loss in the market and right now, I can just lean back, relax, and don’t have to worry about it, right?
One of the biggest challenges of traders is that they don’t know when to exit.
Well, “Have I made enough money on the stock?” and most often it’s never enough. Right? Or “Should I get out? If I get out, I’ll lose money.”
Get out when you risk 2% of your account.
If you’d like to learn exactly what I trade, when I enter and when I exit, visit My Trading Routine – here I have a free, 35-minute training video for you.
Hope this helps. If it does, please make sure that you like it and share it with a friend. Leave a comment below if you found this helpful.