Has the market got your attention?  Last week was tough for a lot of folks, especially for the rookies!  We haven’t had a correction like that in over 2 years and it has a lot of people worried about bigger drops!  This is precisely why we are taking this journey through the eyes of a rookie.  We want to make sure that your eyes are wide open from the start.  Most people get into the world of investing almost blind and then have a hard time figuring out where they went wrong.  I would say that most people go wrong because they don’t treat their finances the same way they treat the other aspects of their life.  Let me try to explain, when we are growing up we are told by the people who care about us the most that we need to go to school so that we can get a good job and live a good lifestyle.  So most of us go to college or university to learn to become doctors, lawyers, tradespeople or whatever the case may be.  We spend a great deal of time, energy and money to learn a skill that will hopefully provide us a lifetime income that we can live on.  Yet when it comes to that income after we make it we tend to give it to someone else to take care of or we go blindly into things we know very little about. Most people would never attempt open-heart surgery without some kind of formal training but yet we will jump into the financial markets with little thought as to how to play the game.  Now, I know that because you are reading this blog and you have joined this awesome community that you are a different breed and you have decided to throw yourself into your education before throwing yourself and your money into the markets and that is exactly why we are writing this blog.  We want to learn before we earn and I welcome you all on this journey.

Last week I said that we were going to continue on in our exploration of indicators and that specifically, we were going to talk about the Bollinger Bands.  I want to kind of switch gears here because I think after last weeks market action that there are few things about trading that I should mention and I think the timing is perfect for this discussion.  I hope you don’t mind but I will save the BB’s until next session, ok?

After talking with a bunch of traders this past week, both newbies and seasoned traders alike, I realized that there were two distinct reactions to last weeks market action.  The seasoned traders that I spoke to were super excited to see that volatility was back in the markets and they were hungry for the opportunities that volatility brings with it.  However, the newer traders I spoke with very concerned about their current positions and the crazy price swings that the market was having.  These crazy price swings are the volatility that the seasoned traders have been waiting for and yet the new folks are fearful of the same thing that seasoned traders are excited about.  This leads one to believe that perhaps the new traders are missing something that the experienced traders already know?

It is this so-called hidden knowledge that makes some fearful and others excited.  Let me be the first to tell you this knowledge is not hidden and it is not some secret that only veteran traders know.  The knowledge is freely given but the real crux of the thing is that only veteran traders are able to grasp the true meaning of the knowledge because it comes in the form of typically painful lessons.

The difference between veteran traders and most new traders is market confidence.  Market confidence comes in many forms.  It comes from the painful experiences I referenced above and it comes from experience in different types of markets.  This market confidence comes from knowing that whatever happens in the markets that they and their portfolios will survive any market conditions.  This market confidence comes from having the experience of already seeing what the markets can do to those who are unprepared.  Most of these veteran traders have gone through the ups and downs of the markets and have learned how to deal with it.  That is all fine and great for a veteran trader but what can a rookie trader do to acquire the market confidence of the pros?

I’m glad you asked, or technically I asked for you.  You as a rookie trader can do the same things that a veteran or professional trader does and by extension, you can gain that market confidence.  So what do pros do when the market goes haywire?  They do the same things that they always do.  They minimize risk!!!!!  The professionals never go into a trade without knowing their total risk and here is the most important thing….they are at peace with those risks!!!!  They have learned to accept and embrace risk and they sleep well at night knowing that their risk is completely defined and that if every position goes against them they will still be around to trade another day.

So, how do we acquire that kind of comfort in our trading, even if we are a rookie?  We need to do a few things.  First, we need to understand and believe that losing is part of winning.  If you cannot get your head around the fact that you will have losses in trading then you are going to have a very difficult time trading successfully.  Secondly, and probably most important is we need to ensure that the losses we do take are not going to crush us.  By crushing us I mean both our bankroll and our souls!  This is where the most important concept in trading comes in…POSITION SIZING!!!!

Position sizing means keeping our bets under control.  We need to know that we are not always going to be right when we put on a trade, NOBODY is right 100% of the time.  As a matter of fact, most of us are wrong more than we are right so we need to set ourselves up to be successful despite being wrong more often than not.  We do this by keeping our bets small so that if we lose then it doesn’t push us past our pain threshold.  What is a pain threshold you ask?  It is simply this….it is the amount of money that if you lost it, would cause you physical or mental discomfort.  Everyone has a pain threshold.  For some folks, it can $10 and for some, it can be $10000.  You need to find your threshold and never exceed it because you will be tempted to do so and that is when trouble comes.  For a lot of people, any more than one day’s wages are usually beyond there pain threshold and this makes sense as people can relate to how long they have to work to make that amount of money.

Let’s think about this if your pain threshold is $100.  Then you should never put on a trade that you have the possibility of losing more than that and the reason being is that if you do your judgment will most likely be impaired by the emotion of money and you will be highly likely to make a mistake and this is just a simple fact.  If you only put on trades where you can’t lose more than $100 then you will be able to look at the trade objectively and then the trade has a better chance of being solid than if your emotions are clouding your thoughts.

I hope this concept is clear to you as I believe it to be the single most important trading concept there is and if you can master position sizing then you can master your emotions and you have a shot a being a successful veteran trader who looks forward to crazy volatile markets instead of being fearful of those same conditions.

Remember that trading in the financial markets is 99% psychological, the rest is just pushing buttons.  You have to win the psychological war with yourself before you can win in trading.

I hope this helps with the fear and anxiety that some were feeling last week.  I believe that if you master position sizing it will take a great deal of the fear out of trading.

In next weeks blog, we will get back into the mechanics of trading and we will check out the Bollinger Bands.  Until then start practicing position sizing.  Check out some of the articles on TackleTrading.com on position sizing so that this concept becomes clear!