Stay in control…of your account
There are not that many things you can control when trading the stock market. But a few things you can control and they are very important to your Riskmanagement.
The most important is your account.
You are in control of selling and buying – and winning and losing.
How is that?
You are the one that decides how much loss you will take and how much profit you will keep. It is a pure function of your own discipline and doesn´t have anything to do with the market, technical analysis or any other outside source, which then puts you in control of your account.
And regarding your account, there is another thing to think about: You have to watch it! We are not kidding this is one of the most overlooked rule in trading, watch your account.
Many people rather watch charts than their account. Unfortunately there is a crucial difference between a chart and your account. The chart doesn’t show profit or loss, it just happens to show movement of the stock.
And it only shows movement and price of the stock. I know it is easy to calculate your current win or loss by looking at a chart and doing the simple math. But this only shows the numbers for a single position, what if you own more than one position. In this case looking at a single chart doesn´t help at all. Watching your account has an important psychological effect on you.
Watching charts, you will more often get involved in wishful thinking. The problem is your hope, the red candle may become green in just a second or you don’t take a loss, because the chart didn’t fall below yesterdays low yet and so on…
Hope is ok, as long as your risk management is not busted, but hope is not ok if you base all your decisions on that hope. Trading doesn´t mean you hope, trading means you base your decisions on facts and facts only as often as possible. The facts you have every day are the numbers in your account because those numbers show your P/L ratio so you need to work with those and forget about the chart.
The only thing you can accomplish by working with charts is improving your hit rate but you do not improve your P/L ratio. Even if you improve your hit rate, that is, you are more often on the right side of the trade right from the beginning, you do not accomplish anything in your account if you still poorly exit positions. For example you go long in AAPL and the shareprice goes up subsequently, you did good, but if now the shareprice comes down and you don´t hit the exit button before the price moves below your break even, you didn´t gain any money and your improved hit rate didn´t help at all.
So, always watch your account, work with it and base your decision on what you see in your account.