Stocks Article

Committing to the Trade

Brandon Wendell
Instructor, CMT

No one likes to lose money.  The thought of it is something that can cause anxiety for many traders and can paralyze us when we should be entering a trade.  Have you ever found yourself staring at the screen watching a trade you should have taken, moving exactly how you thought it would…only that you didn’t pull the trigger?

What causes fear?  We fear the unknown.  Ever feel anxious when going to the dentist?  We fear that we may feel pain from a needle or drill.  If we knew that the visit would just be a routine cleaning then we may not be so nervous to go.

When we trade, the fear of loss that keeps us from trading stems from not knowing where the market or our stock will move.  We trade knowing the highest probability for the price movement based on our analysis.  But in the end, we cannot control the direction of the market.  In fact, the only thing within our control is how much we will lose if we are wrong in the trade.

If you plan your trades properly before entering them, you should know three things:

  1. Entry – The price and the reason for the entry (i.e. trend, supply zone, demand zone, overbought, etc.)
  2. Target – Where you will exit prior to price turning against you
  3. Stop – Where you will exit if the trade does not work out

So when you think about it, you really have nothing to fear.  There is no unknown.  You know how much you will make if you are right in the trade and how much you will lose if you are wrong.  Since the only thing in our control is how much we will lose if we are wrong, let’s focus on that.

In order to control losses, we should first minimize emotions.  We can partially do this by placing our stops in the computer so they are automatically triggered.  Mental stops do not work.  All too often traders will change their minds or talk themselves out of exiting the trade even though they know they should.  Using a trading platform that allows for placing automated technical stops is a great way to do this.

Secondly, we can reduce our losses on trades we may feel uneasy about by taking smaller share size.  It seems like common sense, but if you are shying away from taking trades you have planned, reducing your exposure by taking smaller trades can be a great way to build up your confidence in your trading.

Lastly, rate your trades.  At Online Trading Academy, we teach the odds enhancers as a way to rate the quality of the trade before we take it.  By filtering out marginal trades, we can find our confidence grows as the trades we do take are more likely to be winners.

The mental aspect of trading is often overlooked but is critical to master if one wants to be a successful trader.  Being persistent is a key factor.  Practice and control your exposure to losses and you will find the confidence to take those profitable trades.

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.