Successful Trading - Think in Points, Not Money
The single biggest obstacle to becoming a successful investor is letting your emotions influence your trades.
To keep emotion out of your decisions, developing and sticking to your own personal trading system becomes the single biggest factor in successful trading.
What complicates keeping to your system is that emotional factors keep trying to creep their way back in and one of the most insidious ways this happens is when you give undue attention to the dollar figures you're dealing with.
Imagine that you bought 100 shares of Company ABC at $53 and your trading system tells you that you need to sell it now that it's reached $50.
That's a $300 loss.
Not pennies but not enough that it prompts much of an emotional reaction.
Now, imagine that you bought 1,000 shares of Company ABC instead.
Now your loss is $3,000.
What about 10,000 shares or a $30,000 loss? It's easy to follow your system when smaller money amounts are involved but would you second-guess your system if you were taking a $30,000 loss? Would you be more willing to ignore your trading rules "just this one time" and hope that the stock rebounded and put you back in the money before you sold if you could potentially avoid that big loss? This is where emotion creeps in and attaching monetary values to each trade, while important, makes it much easier to attach those emotions to the results your system is producing.
This, in turn, makes it much easier for you to ignore your system periodically and trade on that emotion.
And, as we know, trading based on emotion is the single biggest trading mistake you can make and will significantly lower the chances that you'll become a successful investor.
So, instead of thinking in monetary values, think in points.
This lets you track your trades without introducing the emotional clutter inherent in thinking in dollar values.
Whereas earning or losing $30,000 makes your heart beat faster and your palms sweat, earning or losing 30,000 points has nowhere near the same impact.
It may seem like simple word games but training yourself to do this can go a long way towards completely stamping out the emotional factors that will ruin even the best trading system.
To keep emotion out of your decisions, developing and sticking to your own personal trading system becomes the single biggest factor in successful trading.
What complicates keeping to your system is that emotional factors keep trying to creep their way back in and one of the most insidious ways this happens is when you give undue attention to the dollar figures you're dealing with.
Imagine that you bought 100 shares of Company ABC at $53 and your trading system tells you that you need to sell it now that it's reached $50.
That's a $300 loss.
Not pennies but not enough that it prompts much of an emotional reaction.
Now, imagine that you bought 1,000 shares of Company ABC instead.
Now your loss is $3,000.
What about 10,000 shares or a $30,000 loss? It's easy to follow your system when smaller money amounts are involved but would you second-guess your system if you were taking a $30,000 loss? Would you be more willing to ignore your trading rules "just this one time" and hope that the stock rebounded and put you back in the money before you sold if you could potentially avoid that big loss? This is where emotion creeps in and attaching monetary values to each trade, while important, makes it much easier to attach those emotions to the results your system is producing.
This, in turn, makes it much easier for you to ignore your system periodically and trade on that emotion.
And, as we know, trading based on emotion is the single biggest trading mistake you can make and will significantly lower the chances that you'll become a successful investor.
So, instead of thinking in monetary values, think in points.
This lets you track your trades without introducing the emotional clutter inherent in thinking in dollar values.
Whereas earning or losing $30,000 makes your heart beat faster and your palms sweat, earning or losing 30,000 points has nowhere near the same impact.
It may seem like simple word games but training yourself to do this can go a long way towards completely stamping out the emotional factors that will ruin even the best trading system.