How to Manage the Highs
and Lows in Trading
By Price Headley
In order to manage your emotions effectively when trading, you need to create
a written plan that you can review regularly to stay focused on your goal of
trading success. By writing down your plan, you put yourself in the top 3% of
individuals who have written goals and plans, giving you an immediate edge on
most traders. Make sure you have answered these questions, which are covered in
further depth in my book, Big Trends in Trading:
1) How will you enter trades? The key to good entries is putting on trades where
there is relatively low risk compared to much higher reward. You should also
write down a clear catalyst for the expected stock move.
2) How will you exit trades? You should define an initial stop point for your
trade, at the point where the trend is invalidated. You will also need a ‘trailing
stop’ technique to protect your profits.
3) What type of orders will you use to enter and exit? When entering,
I like to use limit orders, good for the day only, while exits are often market
orders. Why? Because limit orders allow me to define my risk and reward
clearly on the entry of a trade, while when I need to get out, market orders
allow immediate exit compared to the risk of missing my exit with a limit
order.
4) How much capital will you need to trade successfully? There are economies
of scale as you increase the amount of capital you trade with. Costs related
to commissions, quote systems and equipment begin to diminish as the
percentage of capital invested goes up.
5) What percentage of your capital will you invest in each trade? The amount of
capital I typically use is 10% per trade in my own accounts. I know traders who
commit anywhere from 5% of their account per trade, to 20% of their account
per trade. Your goal should be to keep portfolio risk per trade at less than 2%
per trade. For example, if you invest 20% of your portfolio in a trade, a 10%
loss on that position would lead to a 2% loss on your portfolio.
6) How many positions will you focus on at once? I like to concentrate my
portfolio on my best ideas, plus I like to stay focused on how each stock is
acting. If my portfolio is too big (I’d say more than seven stocks is too many
to focus on), then I will lose focus and invariably miss an exit on a trade that I
should have previously exited.
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Price Headley
7) What will your Trading Journal look like? In my Trading Journal, I note daily
observations, particularly related to my ability to execute my trading plan.
I also commit to doing a post-trade analysis every month. I note what I did
right and wrong, and seek to learn from mistakes to minimize future errors in
similar circumstances, while also looking for winning patterns where I seek to
repeat big successes.
8) What is your Position Review process? I suggest you have an end-of-day
routine to close your day. Review your trades, and assess if you followed your
plan. Keep a log of all your trades, and make comments on each position.
9) What is your Preparation process before trading? You need defined time
to prepare for the next trading day and build up your trading confidence. I
prepare after the close for the next day’s trading, which allows me to formulate
a plan of action BEFORE I get into the heat of battle. This keeps my trading
proactive instead of reactive.
10) What broker will you use? Most traders mistakenly think that commissions
are the number one factor they can control. In reality, commissions are a small
cost compared to the broker’s effectiveness at executing your trade. Your focus
should be finding a broker who gets you speedy and fair execution of your
orders.
Once you have defined these facets of your trading plan, you are in an excellent
position to have a strategy to control your emotions when trading. Make sure to
review your plan on a regular basis to create effective trading habits
