From Jason Fielder from TriadFormula.comRecently I conducted a survey that had the question: “What is your single biggest question about trading?” There were numerous responses, but one that I kept seeing over and over again was…
“When it comes time to place a trade, I just can’t seem to “pull the trigger”.
In my experience, people have trouble “pulling the trigger” for one reason and one reason only: fear. There are three main issues that generate this fear, and all three issues boil down to the trader’s belief about himself, his trading system, or the market. The first is a trader’s psychology. The second is the trader’s confidence in their trading system, and third is position sizing.
Let’s take a look at each one of these factors…
Psychology
Trader’s psychology is an area that I have conducted limited research in, so for that reason I have intentionally limited this topic. I did receive the following quesiton, though, and I felt it was worth address:
“Why I simply can’t follow my trading strategies religiously although I know that I will be able to make money consistently if I do”.
For those of you that have a profitable system but don’t follow it, you might want to research the psychology of trading. There are a few products on the market to help “fix your head”. For example, these products may help you to become ok with being wrong or realizing that you have control over very little. There are a few that I would recommend. These products help youto learn to have the right psychological mind set for trading.
I believe that there are also people out there that should not trade because psychologically they will never be able to handle it. This population is very small, however, and you shouldn’t automatically assume that you’re one of them just because you have difficulty “pulling the trigger”. More times than not the issue lies with the remaining two factors…
System Confidence
The second issue that stops otherwise good traders from pulling the trigger is their lack of confidence in the trading system they are using.
Even if you are the developer of the system, it can be a little unnerving the first time that you place a trade with real money using a new trading system. The best way to handle this fear or lack of confidence is twofold:
1. First, trade in a demo account. There are more than enough brokers out there that offer demo accounts, so you should be able to put your system through its paces without risking any real money. This does take time (especially if you are trading a trend following system), but if you think of your trading as a business then this is just the R&D portion of that business.The key is to have a starting date and a stopping date for your system tests. At the end of your testing pick the systems you want to trade and start small with real money.The testing period may be as short as 30 days for more actively trading systems or as long as a year for systems that trade less frequently, but the outcome should be the same: You gain confidence in the system because you see it making money. You also become familiar with placing trades, which should further build your confidence. Hopefully, you will also go through a draw down during testing so that when it happens with real money you will stick to your system knowing that it will come back.
2. The second way to combat your fear is to have an expectancy as to how your system trades. An expectancy for your trading system can come through the form of trading in a demo account or through back testing.The expectancy allows you to know the personality of the trading system. For example, you can expect to have winning trades 40% of the time or draw downs of 50%. This allows you to monitor and predict (expect) the system you are trading. Having an expectancy will keep you from being surprised by the results of your trading system, whether they be good or bad.
Position Sizing
The third reason that people struggle with pulling the trigger and trading every signal is position sizing. Most people over-trade their account. I’m not referring to the number of trades that are placed, but the percentage of the account that is being traded on any one trade.
Here’s a good rule of thumb that I use: If you feel anxious about the amount of money that you are risking on a trade, then you are risking too much money. Most trading systems are designed to make money when trading only 1% of the account. So, if you have $10,000 dollars in your account, then you can risk $100 dollars per trade.
Most people trade 10 times that amount and then wonder why they are so anxious about placing the trade. I wouldn’t want to place a trade either if I was going to lose 10% of my account if the trade went against me. But when you trade only 1% of your account, you don’t care if you lose it or not because there’s still more than enough capitol to get you back in the black.
If you are trading one full lot and you are anxious about your trades, do me a favor - trade one mini-lot per trade. This should cut your anxiety by 100%.
Remember, the name of the game is longevity. You want to be around long enough to place enough trades that you become profitable. If your system allows you to risk 10% of your account per trade and trade 1000 trades then great, but this is definitely not be the norm. (In fact, if you run across such a system I’d love to hear about it!
In summary, if you are having difficulty pulling the trigger; ask yourself these questions:
1. Do I believe and trust in the system I’m trading? If the answer is no, then get a new system or test your system until you have faith in it.
2. What percent of my account am I trading? If the answer is higher than 2% of your account, bring it down to 1%.
3. Am I mentally fit enough to trade? If you answered questions 1 and 2 positively, but still have trouble pulling the trigger; then you need to learn the psychology of trading.
Until next time…
Good trading,
Jason Fielder
