There are a few things that can really affect your trading mindset that are worth discussing. How you manage risk and how you manage losses are two key components of the trading mindset. Yes, they are part of a good overall process, but if you don’t have a good understanding of them, you might struggle.
STOCK TRADING RISK MANAGEMENT
Your risk management process will set the tone for your trading mindset in every trade.
It’s the first thing you should think about when you do an operation. Point. That’s the name of the game: how long you can survive on the market. Without proper risk management, you won’t.
Stock trading is not a gamble. It shouldn’t be all or anything like Las Vegas. Instead, it’s a game of chance. As part of that game, you need to understand that risk management is the key to your success. Knowing when and where to stop your trades, along with how much of your account you redeployed, is of utmost importance.
As a general rule, we do not recommend risking more than 2% of your account on a single trade at most. Realistically, you should keep it at about 0.5% to 1% of your account. Not every trade deserves the most risk.
However, until you really learn to accept risk, you will interpret market noise as a potential threat and find a way to rationalize to yourself that you need to exit the trade too soon.
However, until you really learn to accept risk, you will interpret market noise as a potential threat and find a way to rationalize to yourself that you need to exit the trade too soon.
To help you with your trading risk management strategies, we recommend watching our SimCast episode with Kris Verma where we discuss the Kelly criteria. It will help you learn how to set your risk and position size for each trade.
TRADING LOSS MANAGEMENT
The ability to reset is crucial in the trading world. Call it resilience, bounce or whatever you like. Those who do not take losses personally and have mastered a way to recover quickly, are preparing for success.
The secret of this is really no secret, as difficult as it is to learn as a new trader. That is, the market is a game of chance. You’re going to lose. And how much good you lose will determine how much you win.
Take Kristjan Kullamägi for example. Kristjan is worth almost $100 million. Yet, it started trading with only a few thousand dollars and exploded countless times.
The most telling thing about Kristjan, however, is her win rate, which is somewhere around 25%. Yes, you read it correctly. A man who has amassed $100 million in about a decade wins only 25% of the time.
Think about it the next time you fight for a losing trade.
Trade-minded quotes
One of the best ways to increase your attitude towards your trading mindset is to read good quotes about the trading mindset. Whether it’s Mark Douglas, Brett Steenbarger, Jesse Livermore or any other trader, quotes have a way of encouraging us in the heat of battle.
With that said, here’s a handful of our favorite quotes about the trading mindset:
“High expectations lead to great frustrations.”
Brett Steenbarger, Ph.D.
“It takes a conscious and deliberate focus to understand how your mind and emotions are affecting your trading and to cultivate the mindset that will support you in achieving your trading goals. It’s not something that happens by itself.”
Créde Sheehy-Kelly
“As long as a stock acts correctly and the market is right, don’t rush to take profits”
Jesse Livermore
“The game taught me the game. And he didn’t spare me the rod while I taught.”
Jesse Livermore
“Successful traders spend as much time studying themselves and their trading as they do studying the markets. In the models of your best and worst trades there is information that can make you the best trader you can be.”
Brett Steenbarger, Ph.D.
