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This site is currently inactive as I have decided to move away from exclusively trading Forex in 2010 and as such will not be taking on new coaching clients in this area.

 



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Until next time


happy trading 


Mr Phil Newton or on LinkedIn Phil Newton trader

Trading Tip | Mental Account Balance

Phil Newton's picture

$1,000,000 in the bank risking 1% of account on any trade means your risking $10,000 per trade.

An extreme example but if you have got that and can afford that, great.

Now lets think for a moment, trading with YOUR current size of position; Do you;

  • Loose sleep at night?
  • Worry about trades?
  • Avoid placing trades?
  • "Fiddle" with trades?
  • Prematurely manage trade to lock profits in?
  • Prematurely manage trade to reduce risk?
  • Have sweaty palms?
  • Fidget too much before during and after a trade?

If you have answered yes to any or all of these questions or a whole long list of related questions then there is one and only one root cause.

YOUR TRADE SIZE IS TOO BIG. PERIOD!

While you may have the physical means to trade with larger position size it does not mean you can or are able to trade with that size of position.

Your mental account balance is far more important. If that means, to not experience any of the above, you have to trade with mini or micro lots then do so.

Doing the right thing is not always what you want to do but it is very simply the best thing you can do.

Jesse Livermore summed this up very well;

"Reduce your position size down to a sleeping level."

Regardless of how big your physical account balance is, if your mental account balance is not also well managed then you will have no hope of succeeding in the long term.

Start small and build your mental account balance up stage by stage as you would do building your physical account balance up so that you are never loosing sleep and stressing for any reason about a trade.

A final question to ask yourself after each trade.

Are you both physically AND mentally able to place the next trade?

Personally while I never trade more than a maximum of 2% of my account equity. In reality it is rarely ever above 1% and often below 0.5% of my account equity which suits my mental account balance just fine to never ever worry about a trade or prevent me from placing the next trade.

Managing my mental account balance this way allows me to apply my first and only golden rule;

Trade sets up, trade goes on.

 

 

edited 17th Aug 2010 to add the comments below

I was trying to explain this concept to a few people yesterday and ended up with this analogy.

If your emotions are the voices in your head screaming at you to take or not to take action. Fear of a trade or missing a trade for example...

The bigger your position size the louder that voice will be and your fears will have a greater impact on your decision making process.

The smaller your position size the quieter that voice will be and your fears will have a hard time being heard to influence your decision.

Reduce your position size down to the point where your emotional voices can non be heard.