By: Alex Dixon, YouCanTrade
Everyone has some level of risk if they are trading; even if they are not currently in a position, they risk missing out on potential profits. These risks spark a variety of fears, but there are ways to deal them. There are four common risks which evoke fear while trading: fear of missing out, fear of loss, fear of being wrong and fear of a win becoming a loss.
The fear of losing money is universal for traders regardless of asset class, trading style, tools, etc. No one trades to lose money, but entering any trade carries the risk of a total or partial loss. The fear of losing money is also an emotional risk traders must deal with.
Losses happen, even to the most experienced traders. The goal is to minimize your losses. Things like stop losses, spreads and portfolio diversity can help minimize losses. The goal of minimizing losses is a concept that is true with pretty much any business. Take a restaurant, for example, which needs enough food to serve customers, but not such excess they are throwing out food and wasting money. The key is to lose less than they gain. It is no different in trading. When you look at trade losses like the cost of supplies, it may make losses easier to cope with.
You should only risk what you can afford to lose. Whether your risk tolerance is $100 or $100,000 dollars, what you put at risk should never be higher than what you are willing to lose. Don’t risk your rent money or your grocery funds. It is also important not to place a position with your entire account, so even in the case of a loss you will live to trade another day.
Consider using a stop loss. Stop losses allow traders to pre-determine what their risk is upon entering a position. If the trader wants to go long, a sell order is placed below the current stock price to exit the position if the price drops to a certain point. If a trader is short, a buy order is placed above the current stock price to exit the position if the price rises to a certain point.
Keeping a journal will also help, because we tend to remember the wins more than the losses. If you journal both clearly, it may make things easier over time emotionally and help you learn about yourself, which may give guides to more consistent, profitable trading. Journaling helps you identify your patterns and rectify mistakes.
Take the next step and start “Mastering Your Mental Trading Process.” This course has a detailed breakdown of the mental processes traders deal with as they go through their day-to-day trading. Learn more.