The Part-Time Trader by Ryan Mallory Page A

would eventually be exposed as such. I placed my stops 7 to 8 percent away from my entry price. This might have been acceptable for me when I traded with less money and fewer positions, but I took on an amount of capital that even from the onset I was uncomfortable with, and did not even know it. Take an average stop loss of 7 percent across seven positions and I'm looking at the potential of a combined 49 percent in losses—not against the portfolio, thankfully, but against my average position size, which is still a ton to lose.
Understanding Risk Aversion
    I am risk averse. I don't like the threat of losing a lot of money in my trading. When I do, I become irrational in my thinking. Therefore, I keep my losses on a percentage basis relatively small. Today, I trade with 2 to 4 percent average stop losses. If the stop loss has to fall outside of this number, then I'm not going to take it, no matter how promising the setup is to the upside.
    Back then, I never counted the cost if all seven positions went against me. Even had half of the positions gone against me while the rest remained at breakeven, I probably would've still conducted a similar type of fire sale—with probably the same amount of emotion, too. I was not trading within my tolerance for risk, and as a result, I made a decision that was irrational.
    You can guarantee yourself that when you trade outside of your tolerance for risk you will undoubtedly make the wrong decision regarding your trades and capital allotted to you. That is exactly what I did, and as a result I had to pay for it dearly. Had I let my original stop losses play out, I would have been profitable on five of the seven trades that I took losses on prematurely. Because my emotions were out of check, and I was trading beyond what I could tolerate from a risk standpoint, I completely mismanaged the trade. The original trades that were made were fine, but the trader clearly was not.
A Simple Step for Controlling the Emotions
    This brings me to my last point. Do not watch the profit/loss total for a day or for a given position. Trading is not about dollars and cents; it's about price and volume. Know beforehand how much you are willing to risk on a single trade and across multiple trades at once. After you determine that, there is no reason to follow the profit or loss you are incurring on a given trade. It will only stir up the emotions. Furthermore, don't look at your profit or loss until after the trade is completed. For some out there, you may want to see if you can go an entire month without looking at the bottom line.
    Profits (or losses) are tied to your position size and how much you are risking. You can determine all of that before you ever enter the trade. But it has nothing to do with the stock you are trading and the subsequent price action thereafter. If you watch the dollars and cents, you will start to do what I am very susceptible to doing. If I'm up a few thousand on a trade, I will begin thinking of what I can buy with that money, or how I can add that money to my son's college tuition or some other materialistic motive. But what is it good for? What does that have to do with trading in the least bit? Absolutely nothing!
    Decisions on buying or selling have to be based on price and volume and any overlays, indicators, or oscillators that you might choose to use. Basing it on a dollar sum is foolish business and will only cause you to trade based on your emotions. Trade what the charts are telling you. If the trend is up, and there is solid support underneath it, then trade accordingly. If you are up 10 percent on a trade and want to ensure that a winning trade does not turn into a losing trade, then tighten the stop loss in an appropriate manner. But do not look at the profits that you might be making and say, “$500 is a lot of money. I'm taking my profits now and my wife, kids, and I are going to the Sizzler.”
    The percentage gained or lost on a given trade is much