Risk Management and Your Emotions

Losing money sucks. Losing more money than necessary because you can’t control your emotions sucks even more….

Well last week wasn’t very fun. Despite my joking around on twitter Friday, I was not having a good day. I got stopped out of some positions and most of the ones I was able to hold onto lost value. Overall a crap day for my account; but hey it’s part of the game right? If you intend to be in this business for the long haul then you have to learn to 1) “stomach” draw-downs and 2) practice risk management. The two go hand in hand. If you can’t control your emotions, you will inevitably fail to adhere to your stops and/or may try to revenge trade. DON’T DO IT!!! If you don’t protect your capital (yes even as it is losing value and giving you that sinking feeling in your stomach) then you won’t have any left to redeploy.

A common part of risk management that I don’t often see discussed is finding the right time to exit your trades. If you have a system with a hard stop and that works for you then by all means, keep doing what works. However, if you are still working on how to cut your losses and manage risk with losing trades then you will again have to learn to control your emotions. It’s usually not best idea to exit in the midst of panic. When everyone is hitting the sell button and your stock is losing value in a major way, you may be struck with fear and willing to take any price you can get just to not see the value of your position go down anymore. Sometimes that may be the right decision, but usually it’s not. It’s rare to see a stock go straight down without some reprieve from a bounce.  If you know your technical levels and see support not to far beneath where price is trading, then maybe wait for it to hit support and see if the stock can bounce giving you a better opportunity to sell without having to take whatever price the market maker will give you.  This involves two forms of emotional control. The first is sitting through the anxiety of watching your stock lose value and not immediately reacting. The second is controlling your greed when your stock actually does bounce. It’s easy to get caught up in the bounce and think, ‘Oh maybe my stock will now go back up reclaiming all I lost.’ Fat chance that is going to happen. If you hold on to that hope, you will likely have to deal yet another emotion, regret. When your stock falls again, but this time through that prior support with no bounce you will be regretting not selling on the initial bounce.

Ways to control your emotion

There is no one size fits all way. You have to find your own way to control the anxiety that comes with trading. Here are some suggestions though:

Exercise regularly – exercise burns away chemicals that cause stress such as cortisol. It also releases endorphins which are morphine-like hormones that are responsible for the feeling of elation. Furthermore, regular exercise requires discipline – exactly what you need when you are controlling your trading emotions. You don’t have to necessarily go to the gym to achieve the benefits from exercise. Even regular brisk walking will do.

Take a walk – If you are feeling an adrenaline rush, maybe go for a quick walk around the block to calm down. If you can’t leave the computer then how about stand up and do a few jumping jacks or push ups. At the very least, stand up.

Take some deep breaths – sounds simple enough right? Take deep breathes and count. By counting you are helping  to break up what your mind is currently thinking. For example, do a four count breath in and a four count breath out.

Write it down – write down your feelings. Do it in ALL CAPS cause you are angry!!! Or maybe just write down how you intend to exit your position. It helps keep your mind focused to take pen to paper.

Collaborate – reach out to another trader and tell him/her your plan. If you want their advice ask for it. If you don’t, tell that person ahead of time you just want to tell someone what your plan is so that you feel more accountable.

Reach out to you pet – If you have a cat or a dog, go pet them. If you have a goldfish, talk to your goldfish and tell him/her how you want to punch someone and how you intend to move forward with your current positions.

Some of these may sounds silly to you, but next time you are faced with that horrible feeling in your stomach you may be desperate enough to try one. And who knows, you may find you better handled your trading.