Treat Your Trading Like a Business
05/17/2011 7:00 am EST
Overcome emotions by thinking like a business owner, methodically trading according to a clearly defined plan and managing risk so that operations can continue the next business day.
There has been much said about the psychology of trading and the necessity that we manage our emotions with every gain and loss. Emotions tend to rise to the surface during times of uncertainty as we are faced with an unexpected situation or crisis.
How would we feel to win the state lottery worth over $100 million? It is easy to say that we would feel very surprised and in fact ecstatic.
On the other hand, how would the average person feel to lose their life savings in an investment of some type? Most would assume we would feel pretty horrible, but these emotions should not come into play as we trade our accounts.
Speculating in the financial markets should be approached with the same planning, research, and discipline as a small business owner spends each day making decisions in order to improve revenues and reduce risk.
It would be absurd for a business owner to fall into panic during the first or second slow day of sales. We would logically expect that entrepreneur to simply review the mission statement and ensure each one of his/her actions has this mission statement and long-term business plan in mind.
Let’s take a look at a current trade set-up on the AUD/CAD daily chart below:
The AUD/CAD is in a clear uptrend, and we can see the clear break above the 1.0200 area that is represented by the horizontal line. Prices are now testing the previous resistance zone from the opposite side. We might look for the 1.0200 area to act as support because past resistance usually acts as future support.
This has been confirmed with price action finding support near the 1.0200 area during the past few sessions. With prices currently at 1.0233, we might place an entry order at 1.0225 with a stop at 1.0175, thus risking 50 pips on the trade. We might place a limit at 1.0375, so we are risking 50 pips to make 150 pips for a risk:reward ratio of 1:3.
This is a trade set-up; and that is all it is. This is one of several thousand trades that I am going to make during my trading career.
The results of this one single trade do not matter at all. The trade may or may not work out, but that has absolutely nothing to do with my analysis.
One of the most common mistakes I see in newer traders is that they put too much emphasis on the current trade. They live and breathe for that trade. Again, we have to treat trading like running a business. It is a numbers game.
With a consistent approach and a respect for risk, we should decrease the importance of the current trade and think of it in terms of the long haul. In other words, we should trade to trade tomorrow.
By Matt Russell, contributor, DailyFX.com