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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Limiting your risk whenever possible is really the key to successful tradingLIMITING RISK EXERCISE As weve learned throughout this book, limiting your risk whenever possible is really the key to successful trading. Most people dont realize this when they first start trading. They think that just finding winning trades will make them rich. But if youve been trading for any extended period of time, you know nothing could be further from the truth. The key to thriving is to stay out of trouble and avoid big losses while protecting your winning trades from turning into losing trades. Without this skill, all the winning trades in the world arent going to help you in the long run. I guess the real problem comes because most people dont learn this until theyve already learned bad habits that are difficult to change. For most people, they realize they must take a defensive position with their trading, but they dont realize soon enough. In fact, when they finally do learn that they need to be protecting themselves, theyve usually acquired poor habits that conflict with the idea of protecting themselves. Ive come across thousands of traders. Unfortunately, many of them have the same problem. Because theyve been beaten up so many times by the market, they get very, very, greedy when they do get a winning trade. In fact, they are so greedy they do very little to protect the winning trade theyre in at the time. Its not as if they dont know they should be protecting themselves (by trailing a stop order to protect profits or locking in a break-even trade if the market goes your way). They know they should be taking a defensive posture (in other words, limiting their risk in every way they can), but their greed and bad habits override what they should be doing. And, of course, its no surprise that these people turn large winning trades into large losing trades. Without changing those bad habits, it will be impossible to succeed. The greed makes you not protect yourself. But being greedy is not in your own best interest. In fact, just the opposite, being greedy is in the best interest of other traders out there because if you are greedy, you will simply give your money to them. There is very little chance of holding onto it. So we need an exercise to help us protect ourselves by limiting our risk. Thus, we will consistently act in our own best interest and not be greedy. My guess is if you are constantly turning your winning trades into losing trades, you arent acting in your own best interest, and this exercise can help you change those bad habits. EXERCISE 1) Get in a relaxed state with the relaxation technique Calm Body, Calm Mind. 2) In this visualization exercise, we want to mentally practice trailing our stop orders to lock in break-even and profitable trades. It is very important to take a defensive posture when trading, and this exercise can help us learn to make that a habit. In other words, we want to learn to Stay Out of Trouble. (This is a term used on the trading floor that means a trader is having a bad day, but he is still acting in his own best interest. In other words, even though he is having losing trades, he is not losing too much money.) 3) Just like in the previous exercises, we want to visualize some trades in the past where we were successful. Hopefully, you can remember some trades where you did trail your stop order to lock in a profit and you were successful in doing so. Remember the details (as much as possible) of those trades and relive the winning feelings you had. Play those trades back in your mind realizing that you were acting in your own best interest by protecting yourself and your profitable trade. 4) If you cant remember a trade where you trailed your stop order, or if you havent had any trades like that, then youll need to make them up. Remember to use as many details as possible and to feel how you would feel if you were acting in your own best interest and having successful trades. It will help if you can get some confident feeling first by remembering a time when you were confident (even if its not related to trading). 5) The next scene you want to see in your minds eye is you getting into a trade that you perceive as a good opportunity. Again, its easier if you can remember a previous trade (thus, its easier to remember and see the details if it was a real situation). But you can always use an imagined situation if you dont have a real one. See yourself getting into the trade by placing the order and your protective stop order (you should always be using stop orders in my opinion). Again, with details, see yourself watching the market. What does the computer look like? How does the mouse feel in your hand? What else is around you, a phone, keyboard, printer, hard-drive, etc. See the details. 6) The next thing we want to see in this little movie is the market starting to move in our direction somewhat. As that happens, we pick a point where the market should move and then we will trail our stop to break-even. 7) When you trail your stop to break-even, make sure you see in your minds eye everything you would do to trail your stop. See yourself calling up and cancel-replacing your stop order. See yourself clearly scratching out the old price of your stop order and writing the new price down. 8) If you trade through your computer, then see yourself touching the keys to move your stop order to break-even. See yourself hitting the correct button to transmit the order. Do everything in your mind just like you would in real life. 9) Now switch to the next scene in the theater of your mind. Now we want to see the market continuing to move in our direction. Lets say for discussions sake that the market has now moved $800 in your favor. In your minds eye, see the market having moved $800 your way on your chart. You dont want the market to come all the way back and take your profits away. So you need to trail your stop to lock in some profit. 10) See yourself trailing your stop to lock in half your profit. See yourself picking up the phone to cancel-replace the order again. See yourself scratching out the old price again and writing in the price. Was there a new order number? Mentally write that down too. 11) Now see the market coming back and hitting your stop order. See yourself taking a nice profit because you acted in your own best interest. Feel those winning feelings, and get ready to move onto the next trade. One of the most important things you can think about (and get into the habit of thinking about) is the previous trade is now over. No matter what happens next, that trade is over and its now time to forget it and move onto the next trade. Many people get caught up in the idea that they should have done this or that differently. At the end of this visualization exercise, you should see yourself effortlessly forgetting about the last trade (no matter what happened), and move onto the next trade. The next exercise will help you forget about your previous trades. |
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