How to Protect Emotional Trading Capital

By | March 22, 2013

What a week this one was. Wild, sharp, quick, and volatile moves. If you held a position more than 5 minutes the odds are that you felt some pain financially or emotionally. Big winners turned into small winners and small winners turned into big losers in the time it took for a restroom break.

Markets like this one are not only dangerous for losing money they are dangerous for losing your will to win. New traders can beat themselves up in this type of market for losses. It is not you, it is the market. In a volatile market like this it is smarter for a new trader to stay in cash and just track their watch list and watch the show.

Most profits come from sustained trends that emerge out of bases not a chop and slop. This is a market for the quick, the best day traders and top option traders that can use a few non-directional option plays to milk volatility. However it is very difficult to make money consistently with these strategies and they can be exhausting. Right now cash is king for the vast majority or traders in my humble opinion until the March Expiry gets over.

There is not only a risk of ruin for your financial capital, many great traders have bounced back multiple times from losing their accounts when they had passion and confidence in their own eventual success. But if you blow out your emotional capital you lose your confidence, your belief in your eventual success, and your passion to trade that is something that usually ends your trading career.

Here are ten ways to conserve your emotional trading capital and decrease your risk of emotional ruin as a trader.

  • Trade the market you are in, do not try to short bull markets picking tops or go long bear markets picking bottoms. Fighting the prevailing trend can be ruinous for you emotionally due to many losses in a row and the size of those losses. Trade with the prevailing trend.
  • Your first loss is your best loss, take your stop when it is hit. Early in my trading instead of taking my stop loss I would instead hope for it to come back. Instead of losing a few thousands in the morning I would sit with a loss baby sitting it as it grew into a multiple thousands  loss or more. So I lost trust in myself to take a stop, spent 6 hours of my life stressing over a position that I should have stopped out and even reversed, and lost lakhs. Those kind of trades damage a trader emotionally, cut your losses!
  • Do not trade a position size you do not feel comfortable with. If you hands are shaking and your heart is pounding, if you are obsessed with every tick you are trading too big. Bring the size down to one that keeps you engaged but does not change your behavior. If you can not have a casual conversation with someone while trading you are trading too big.
  • Never risk more than 1% of your capital on any one trade. Each trade should be only 1 of the next 100 trades. No one having too much of an impact on your life or trading career one way or the other.
  • Only trade aggressively with speculative money, do not risk your retirement account on a big trade idea. Do not trade with your whole net worth or with money you need to send a child to college, or pay bills. It is not emotionally healthy to have the pressure of your very lifestyle on the line while you trade, trading is hard enough.
    You will only be able to emotionally trade a plan, system, or method you believe in. If you did not do the research to understand how and why your system makes money you will not have the emotional capital needed to trade in by believing in it.
  • Do not trade a volatile swinging market or a bear market if that is not your style. Wait for the market to be conducive to your entries and method. Forcing trades that become losses cause losses of both financial capital and emotional capital. Discipline and patience build emotional capital by building faith in yourself.

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4 thoughts on “How to Protect Emotional Trading Capital

  1. Dr. Rajesh zala (M.D.)

    Dear Brahmeshji ,
    Superb & Inspiring Article;
    one & only Market mantra is ,
    CUT THE LOSSES
    CUT THE LOSSES
    CUT THE LOSSES

    Thanks.

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