Not a day goes by when I'm not asked to counsel a new trader on trade management and realistic expectations. Expectations are not projections or probabilities. Expectations are not a statistical or analytic animal. Expectations are emotional and psychological, and trading psychology should be the most important focus for a new trader. Trading psychology will determine your success or failure over the long term, period. In this article, I will cover some core psychological areas you will need to be aware of to be a successful trader.
RISK
The first trading psychology topic I will discuss is proper trade management. What is proper trade management? Basically this:
Absolutely Never risk more then 5% of your account balance on any one trade. This means that your maximum Stop Loss on any one trade should not exceed 5% of your total account balance. For example, if you had a $1000 account, 5% of $1000 is $50. This means that your maximum stop loss should not exceed 50 pips assuming you are trading one mini contract with a value of $1 per pip. I see new Forex traders every day risking 20, 30, even 40% of their account on one trade. With that much risk, and four losing trades in a row, you'll wipe out your account. You won't last long taking wild risks like that, and the psychological damage will be permanent. So minimize risk. Use 5% as a maximum risk threshold. Personally, I risk no more then 1-3% on any one trade. If you have a larger account, you should follow the same rule, no exceptions. No matter how good a trader you are, it's not unheard of to have 6-8 losers in a row. No one likes it, but if you stick with a 1-3% risk limit, expect and be psychologically prepare for it, it will roll off your back instead of breaking your spirit.
LOSES
Many traders long for Van Helsing's cross to raise when this hellish beast shows it soul-stealing teeth: Losing trades! A new trader will often feel ashamed after incurring a losing trade. He feels that he has made a mistake and beats himself up over it. Penance does no good in this life, so confess your trading sins, resolve to sin no more, but do not scourge yourself. Listen to the Truth: Losing trades are part of the game and are to be fully expected. Forgive yourself, and move on, but do not give up. It is the trading journey that overall will be correct, not each individual step. So accept each misstep. Like a shopkeeper paying rent to keep his store open, losses are part of the cost of doing business as a trader.
RISK
The first trading psychology topic I will discuss is proper trade management. What is proper trade management? Basically this:
Absolutely Never risk more then 5% of your account balance on any one trade. This means that your maximum Stop Loss on any one trade should not exceed 5% of your total account balance. For example, if you had a $1000 account, 5% of $1000 is $50. This means that your maximum stop loss should not exceed 50 pips assuming you are trading one mini contract with a value of $1 per pip. I see new Forex traders every day risking 20, 30, even 40% of their account on one trade. With that much risk, and four losing trades in a row, you'll wipe out your account. You won't last long taking wild risks like that, and the psychological damage will be permanent. So minimize risk. Use 5% as a maximum risk threshold. Personally, I risk no more then 1-3% on any one trade. If you have a larger account, you should follow the same rule, no exceptions. No matter how good a trader you are, it's not unheard of to have 6-8 losers in a row. No one likes it, but if you stick with a 1-3% risk limit, expect and be psychologically prepare for it, it will roll off your back instead of breaking your spirit.
LOSES
Many traders long for Van Helsing's cross to raise when this hellish beast shows it soul-stealing teeth: Losing trades! A new trader will often feel ashamed after incurring a losing trade. He feels that he has made a mistake and beats himself up over it. Penance does no good in this life, so confess your trading sins, resolve to sin no more, but do not scourge yourself. Listen to the Truth: Losing trades are part of the game and are to be fully expected. Forgive yourself, and move on, but do not give up. It is the trading journey that overall will be correct, not each individual step. So accept each misstep. Like a shopkeeper paying rent to keep his store open, losses are part of the cost of doing business as a trader.
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