c18 JWBT016-Busby September 30, 2008 15:3 Printer: TBD
Psychology and Discipline: The Winner’s Edge 175and respond appropriately to them. The pros use good risk management to
limit losses and keep them in proper perspective.
There are several ways that I balance these destructive emotions and
keep my trading on track. First, I recognize the problem and face it. Know-
ing the risk of a trade before I take it helps me reduce fear. To determine
my risk I identify the price point where the market will prove me wrong.
That is my maximum exposure. If the price moves to that point, I no longer
want to be in the trade because the odds of success are not in my favor.
Knowing the risk calms my fears. If I am unwilling or unable to take the
risk, I do not take the trade.
For example, if the S&P 500 futures open at $1331 and begin selling
off. I might take a short position. As long as prices stay below the open
and continue downward, I’m okay. But if the bulls start buying and prices
move up strongly and cross into positive territory above the opening price,
I have to reevaluate my trade. Perhaps I have made a mistake and it is time
to bail. An important resistance number has been broken and the market is
sending me a message. Identifying the risk before clicking the mouse tames
my fears and allows me to focus on the numbers and the trade rather than
my emotions.
Another essential step to reducing fear is preparation. Before I trade, I
am ready. I have identified key numbers. I know the indicators I will watch.
I have identified the times when I will look to trade and the times I will sit
on the sidelines. When the session begins, I know the buying and selling
areas that I am anticipating. If the market goes there, I am ready to make
my move. Being prepared reduces fear.
In addition to the normal fears that all traders face, novice traders are
also fearful that they cannot operate the equipment correctly or handle
the trading platform. These are real fears and they must be dealt with. I’m
from the deep south, and I do not have the chance to go skiing very often.
However, occasionally I dare to hit the slopes. When I first started skiing,
I had to adjust to the sensation of gliding downhill. Standing on top of a
mountain and looking at the bottom of the ski run can be a sobering sight.
What if my speed is too great and I am heading for a tree? Or a person? Can
I stop? Do I have the skills to safely make my way down the slope? It is a
real fear. However, once I mastered the art of control, my fears diminished.
When I knew I could stop when I needed to do so, I was no longer afraid
to point my skis downward and lean into the move. Only then was I able to
be carefree and enjoy the fun of skiing. I was in charge and fear was held
in check.
For the novice, trading is like standing atop a mountain and fearing
that you have no control when skiing down it. What if there is a need to
stop? What if you head for a tree or a dropoff? Will you be able to stop on
the slope and prevent injury? In trading the question is: Can you get out