Think "Risk First" to Manage Your Emotions While Trading

Winsor Hoang |

Risk.jpgThere are few things that can make a grown man as worked up and emotional as trading. Gaining money gives the trader a rush, a boost of confidence, and a feeling of achievement. Loss, on the other hand, can make the trader experience self-doubt, anxiety, and in some cases depression. Traders who are consistently profitable are able to control their emotions. Being able to effectively manage emotions is a skill that needs to be developed, but here’s a tip that helps: think "risk first".

When a trader thinks "risk first" they are managing the risk of each trade they make. Risk management is part of money managing, and any successful trader will tell you just how important money management is. A trader cannot be consistently profitable without good money management skills. Most "gurus" will simply tell you to look at your risk to reward ratio when managing money. But what’s interesting is that a majority of traders will consider their rewards more than the risk they have to take. What they don’t grasp is that trading is not just about winning. Losing is a huge part of trading; it’s inevitable, and a trader can go through a string of losses that can wipe out his account. Loss has to be prevented if a trader is to be profitable. In order to do this, traders manage risk.

A trader who manages risk thinks about how to prevent loss, instead of becoming obsessed with potential rewards. This strategy is actually more effective in the long run, because rewards don’t need to be managed: they take care of themselves. Risks, however, do need to be managed, so as to prevent losing to the point of a dry account.

Keep Emotions in Check

Another bonus to risk management is that it also helps with emotional management. Odd as it may seem, managing money and managing emotions are actually not separate skills in Forex trading - they work together. A trader that has developed good money managing skills by thinking "risk first" is emotionally prepared for loss. They know where to set their stop losses, and they're usually prepared for unexpected economic events and financial uncertainties. The more prepared you are for a bad trading day, the less anxious you’ll be while trading, the more likely you'll be to make logical, clear-headed trades.

Thinking "risk first" also helps a trader to manage the emotional effect of achieving substantial gains. A trader who trades because of the rush they feel when they win is at risk of becoming a gambler. This type of trader can easily wipe out their account from overtrading as they try to keep up that high feeling. But managing risk can help traders learn how to deal with their emotions when they are in winning mode. They do this by paying careful attention to how they feel when they win, and then take steps to control their emotions, so they can prevent themselves from getting overexcited.

Manage Risk and Make More Strategic Trades

They also use their money management skills to develop strategic trades that have an edge. Strategic traders are less likely to be emotional because they are not relying on luck. This gives them more control over their losses and gains, which helps curb the highs and lows that are often experienced by emotional traders. Strategic traders carefully consider the potential risk that is inherent in each reward.

Money management and emotional management should be used together to help make you a profitable trader. To help develop your money management skills, focus more on the risk involved in each trade and how to prevent loss.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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