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.
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.
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 Avatrade Trustpilot reviews business as a trader.
New traders sometimes act like impatient scientists, adopting and rejecting theories and models haphazardly. But real science not only includes patience, but requires it. An inexperienced trader may try a new system briefly. If it fails a couple times, will say “This doesn’t work” and discard it, the same way an impatient scientist might if looking at an ineffective compound for a cure for a disease. If it doesn’t work, then it must be wrong, I often hear. Perhaps however, the observed timeframe was too brief, or perhaps the compound was impure, or contaminated. This same mistake is often made in trading. A system must be applied over a sufficiently long period of time, and it must be applied precisely and without emotion. I often hear “Hey Steve, I have a great trading system. Watch me…I’m going LONG here and if it works… I’ve proved to you this is a great system, blah blah blah”. To these dear, excitable, impatient traders, I have some hard-won advice for you: If a system wins six times in row or loses six times in a row, it proves nothing! It doesn’t say anything about the value of the trading system. Do not judge a method over a few trades. Basing conclusions on statistically invalid data sets (too small, too few trades) is one of the biggest psychological mistakes the new or impatient trader makes. Trading is an art which must be mastered over time. Everyone must serve his time in the trenches, and so must every system. Every trader starts out as a losing trader, and every system starts by being insufficiently tested. Some traders lose for months while others lose for years. Some systems work for two trades, some may work for five hundred. This is why most traders leave “trading” after such a short tenure, and why systems come and go. Stamina, statistical validity, and psychological preparation are what make for a successful long-term trading career.