Money Risk Trade Management | Pyschology of Trading


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Money Risk Management & Trading Emotions

Trading emotions play a vital role in the success or failure of traders. Emotions affect our results and will prove the difference between successful and unsuccessful trading. Healthy Money Risk Management Psychology begins when you believe and acknowledge that each trade's outcome is unknown at the time you enter the Trade! Let me show you how emotion may play out...

Money Risk Management emotional Roller Coaster

Are you one of the Average traders?

  • You have no trading plan or view.
  • You have no money management rules
  • You have no risk management rules or use a Stop Loss
  • Your prone to emotional swings (price goes up - happy, price goes down - the sky is falling)
  • You are nervous most of the time when in a trade
  • You quickly "give back" to the market your recent gains
  • You try to recoup losses immediately (revenge trading)
  • You are glued to the computer screen all day watching every price movement like a hawk
  • You never review your trade results to follow up on winners and losers.
  • Here is an easyb one: You are losing MONEY!


I want to talk to you about what an average trader is.  Unfortunately the majority of people fall into this ‘average trader’ category.  Basically, they seem to think that trading is easy and for whatever reason they buy a stock, the stock’s immediately going to go in their favor.  Heaven forbid they actually are successful, because now that reinforces that behavior going forward and it really sets up for a major disaster.  If you’re an average trader, you have no trading plan or view of trading.  It’s just that simple.  Most people treat this as a hobby and they have no trading plan to speak of.  They have absolutely no money risk management rules.  If you’re sitting here reading this and you have no money risk management rules whatsoever, don’t worry.  You’re part of the average trader that is out there.

Are you prone to emotional swings?  So, price goes up, you’re immediately happy; if price goes down, you’re trying to jump out of a window.  Those types of emotional swings are typical with average traders.  Are you nervous most of the time when you’re in a trade?  Can you sleep at night?  Average traders don’t have confidence in their system or their plan so they’re usually pretty nervous whenever they’re in a trade.  You quickly give back to the market your recent gains.

Let me know if this sounds familiar:  You make $500 on a winning trade.  You feel great.  And then on the very next trade you get cocky and end up losing $700 and give back all of those gains that you just made to the market and more.  This is very common.  It doesn’t mean you’re a failure.  It just means that you’re an average trader.

Technical Analysis Confusion?

You try to recoup losses immediately, also known as revenge trading.  Basically, here is how it occurs....  You take a modest loss on a trade,  let's say $1,000.  Now, you feel you are on a mission.  You immediately go out looking for a trade so you can make up for that $1,000.00 loss.  You end up chasing a bad entry or for whatever reason you end up pushing the pace and get into a wrong share and you end up losing even more.  Does this scenario sound familiar? 

You’re glued to your computer screen all day long watching every price movement like a hawk.  This goes hand in hand with your emotional swings.  It goes up, you’re happy; it goes down you’re ready to beat your head on the keyboard.  If you’re stuck all day watching prices and you’re constantly on an emotional roller coaster?  Don’t worry.  You’re not alone.

How about this one?  Do you ever review your trade results and follow up on your winners and your losers?  I can guarantee you that professionals definitely follow up on their trades.  And if you’re not following up on your winners – do you think this might be a good idea?  You have a winning trade and you actually look back at it and say “Hmm, what did I do right in this trade?”  How about your losing trades?  How about looking at your mistakes and determining where you’re going wrong over and over again?  Do you think that’s something that might help you improve your trading?  Most people don’t do this and they continue to lose. This is why they’re average traders.

Here’s a really easy one.  Are you losing money in the stock market?  If you are, you’re like the majority of people, which puts you in the average trader category.  

To be a successful trader you need a Trading Plan not based on emotion and have the discipline to follow it. To have this discipline means following a set of rules like a robot without emotion and taking action when required. The 4 major components of a trading plan are:

1. What to trade and when - Comes with Education and Experience

2. How many to trade - Money Management also known as Position Sizing

3. When to get out when you have it wrong - Risk Management aka Initial Stop Loss

4. When to get out when you have it right - Risk Management aka Profit/Trailing Stop

So now you have a trading Plan or set of rules that will tell you what, when and how many to buy and when to get out. How about performance?

You have back tested the rules and find it simple to follow. It does result in losses but overall it has a positive Trade Expectancy.

You are now have the confidence in implementing these rules and enjoy trading profitably.

So how do you develop such a Trading Plan?

 It can be a very time consuming exercise and a very expensive one....what is the solution?

Position Sizing Money Risk Management made simple!

             FREE 14 day Money Risk Trade Management trial here

  Learn more about how to make Money, Risk and Trade Management for Share Traders, simple!

That all sounds great but I do not have access to Metastock format EOD data download?

View video below for your answer.....

Ten Dangerous Things People Say About Stocks, based on emotion

Peter Lynch was the most successful fund manager in the world from 1977 to 1990, when he ran the Fidelity Magellan Fund. The fund grew from $20 million to $14 billion in assets under his leadership, and he walked out on top.

Just before he retired, he wrote the best-selling book, "One Up on Wall Street: How to Use What You Already Know to Make Money in the Market." Lynch would often hold more than a thousand stocks at a time in the Fund, and has probably bought and sold more stocks than anyone on the planet. I can't think of someone more qualified to share the ten silliest (and most dangerous) things people say about stock prices.

Peter's list is below. If you can remember this list you'll no doubt be a much more successful investor. When you catch yourself saying one of these silly and dangerous things, bite your tongue!

Generally, these are emotional justifications for bad decisions. It's simple to correct a bad decision on a stock - get out of it. Without further adieu, here's Peter's list of The Ten Silliest (and Most Dangerous) Things People Say About Stock Prices ...

1. "If it's gone down this much already, it can't go much lower."
2. "You can always tell when a stock's hit bottom."
3. "If it's gone this high already, how can it possibly go higher? "
4. "It's only $3 a share, what can I lose?"
5. "Eventually they always come back."
6. "It's always darkest before the dawn."
7. "When it rebounds, I'll sell."
8. "What me worry? Conservative stocks don't fluctuate much."
9. "It's taking too long for anything to ever happen."
10. "Look at all the money I lost - I didn't buy it!"

Let's take a quick look at each one...

1. "If it's gone down this much already, it can't go much lower."

I KNOW that you've said this to yourself in the last few years. You said it on Lucent. On Cisco. Sun. AOL. Enron. WorldCom. How many times does an investor have to say this before they learn it's silly and dangerous? Outside of ZERO, there is no rule for how low a stock can go. The best advice I can give here is if you catch yourself saying this, it's time to GET OUT.

2. "You can always tell when a stock's hit bottom."

This is silly. NOBODY knows when a stock will bottom. For some reason, investors and commentators love to call "the bottom" in a stock or the stock market. Instead of trying to catch a falling knife, it's much safer to let the knife hit the ground... and let it wiggle around a bit to be sure... and then pick it up. Don't try to guess the bottom in the stock price.

3. "If it's gone this high already, how can it possibly go higher?"

If you want to make ten times your money, you can't sell before the stock goes up ten times. But nearly all investors do sell early in the big winners, because of this faulty logic. The only way you make REAL money in stocks is letting them go higher - by not taking a profit early. It's hard. But you've got to let your profits ride...

4. "It's only $3 a share, what can I lose?"

What can you lose? You can lose 100%. Whether a stock is $3 or $50 if it falls to zero, it's a 100% loss. If it falls to 50 cents, it's not much better. The first stock is down 83%, the second down 99%. Three bucks is no guarantee of a bargain. Resist the urge; it's dangerous. You can still lose it all.

5. "Eventually they always come back."

I'm hearing this a lot these days. It's as if WorldCom, Enron, Global Crossing, and all the "dot.coms" were some kind of fluke. This is silly and dangerous simply because they DON'T always come back. If you catch yourself saying this about one of your stocks, it may well be time to get rid of it. Make sure you're using your trailing stop here...

6. "It's always darkest before the dawn."

For 20 years, gold has done nothing but fall in price. But every year, somebody is saying "it's always darkest before the dawn." Applying that to stocks is a bit silly. Peter Lynch says "SOMETIMES it's darkest before the dawn, but then again, other times it's always darkest before its PITCH BLACK." If you're saying this phrase, and you really believe it, then please be absolutely certain that you're not just rationalizing a bad decision.

7. "When it rebounds, I'll sell."

I've heard this dangerous phrase hundreds of times. Yet I've never once seen someone follow his own advice here. When it rebounds, they decide there's nothing wrong with it, and they keep it. If it never rebounds they keep it. The reason people do this is they don't like to admit they're wrong, so somehow, by holding a losing stock instead of selling it, there's still a chance that they'll be right on this loser. Usually, they're not. If you find yourself in this boat, your best bet is most likely to SELL NOW.

8. "What me worry? Conservative stocks don't fluctuate much."

There isn't a stock on the planet you can afford to ignore. And as we've learned in the stock market shellacking of the last two years, even blue chips can get clobbered. This quote is probably a justification for people to not pay attention to their investments. That's a bad idea. It's your money. It's worth a little attention.

9. "It's taking too long for anything to ever happen."

I hear this phrase all the time. Investors want ACTION. But think about this - a 12% annual return is about 1% a month. That's a great return, but there's no action. You don't need action. Be patient. Lynch says it takes remarkable patience to hold onto a stock that everyone else seems to ignore... most of the money he makes he says is in the third or fourth year of owning it.

10. "Look at all the money I lost - I didn't buy it!"

I'd be so much richer today if I'd just bought _______. Lynch says this thinking "leads people to try to play catch up by buying stocks they shouldn't buy, if only to protect themselves from "losing" more than they've already "lost." This usually results in REAL losses."

** Take a moment and give yourself a quick "pop quiz." Have you made any of these statements - or statements like these - in the past? If were most likely trying to justify a decision that turned out to be wrong. In the long run it is much easier - and ultimately less painful - to correct a bad decision quickly than it is to continue searching for emotional justification as your portfolio continues to shrink.