Traders sure have a lot to think about in this day and age. Factors like economic and monetary policies, changing interest rates, the dangers of trading on margin, and the constant threat of equity and geopolitical risk, well, those are just the beginning. So here’s an honest question: What functions of trading and areas of the markets get the majority of your attention?
Are you all about analysis and trying to predict the market’s next move? Do you work hard to stay in tune with the latest news and economic data? Or maybe, like most traders, is good, old P&L what you obsess about most?
This is actually something of a test, but it’s a very unique one at that. It’s a test to see if you care about the right things and pay proper attention to the factors traders can control, not the ones we can’t.
This is important because while we all live and trade amidst changing times, one thing that hasn’t changed is this: There are certain distinct factors traders can control, and others we simply can’t. And, just as you wouldn’t want to commit physical capital (money) where it doesn’t belong, you mustn’t spend valuable emotional capital where it’s not rightfully due, either.
Traders can control which set-ups they trade. Exercising ultimate control over the set-ups they trade—and being ultra-selective about them—is the closest traders can get to controlling the market. We can’t physically make any single trade go in our favor, after all, but traders can control the trade-selection process right down to the finest detail, ensuring they have confidence and conviction before putting even a drop of physical capital at risk.
Traders can control how much capital, risk, and margin is used. Just like your strategy dictates what set-ups to trade, it also sets a baseline for how much capital and risk will be used each time, and whether or not to allow trading on margin.
Now, committing no more than 1% of total account capital to any one position is a common rule, as is requiring a reward/risk ratio of at least 2:1 for any trade set-up. Of course, you’re free to set your own risk parameters; the point is that you should never break them. It’s dangerous, ill-advised, and nobody in the market is forcing you to bet bigger and more aggressively. And, because risk management is a function traders can control in its entirety, you need not force yourself, either.
Traders can control their expectations. Often, in the rush of selecting and managing trades, traders forget to manage their own expectations and come to anticipate perfection with every trade. Realistically, though, trading is about applying a proven strategy to realize expected results over the long term. With that, small losses are acceptable while in pursuit of larger wins down the road.
Losing trades are inevitable, after all, and they don’t require an aftermath, like anger or emotion. While we can’t control outcomes, traders can control expectations before, during, and after every trade, all the while staying rational and committed to executing their strategy over the long term.
See also: How Do You Recover from Losing Trades?
Clearly, it’s just the decision-making processes and internal factors that traders can control, so here’s another question: Why does it seem like many of the things traders obsess about the most are all external factors that are beyond their control?
Factors Traders Can’t Control Include:
If these factors contribute to your own stress level in trading, perhaps it’s time to ask yourself, why? Take stock of where and how you “spend” your emotional capital, and make sure you’re supremely focused only on those factors traders can control, not obsessing about all the outside “noise” that is so prevalent in the markets and trading.
See related: How to Profit More by Doing Less
In life, they say that sometimes “You have to be your own advocate,” “Get your own back,” or “Look out for #1.” That’s all meant to suggest that you help yourself become the best you can be, and in trading, that means paying more attention to what you can control, and minimizing what you can’t.
To that very end, traders must strive to leave outside factors in the hands of the markets where they belong, and turn the focus inwards, at what each of us can do to be more consistent, knowledgeable, and confident in our trading process. Start today by banishing those unnecessary worries. It’s very empowering, and you may find that it quickly clears the way for more clarity and less stress than ever before.