One of the basic problems that most traders face is dealing with risk. For example, two primary rules to successful speculative trading are: Cut your losses short and let your profits run. Most people cannot deal with those two rules. For example, if making money is important to you — as it is to most people who play investment games — then you will probably have trouble taking small losses. As a result, small losses turn into moderate losses, which are even harder to take. Finally, the moderate losses turn into big losses, which you are forced to take — all because it was so hard to take a small loss. Similarly, when people have a profit, they want to take it right away. They think, “I’d better take this now before it gets away.” The bigger the profit becomes, the harder it is to resist the temptation to take it now.
The simple truth is that most people are risk-aversive in the realm of profits — they prefer a sure, smaller gain to a wise gamble for a larger gain — and risk-seeking in the realm of losses — they prefer an unwise gamble to a sure loss. As a result, most people tend to do the opposite of what is required for success. They cut their profits short and let their losses run.
If you think of trading as a game and that a mistake is not following the rules of the game, then it becomes much easier to follow these two rules. You should review your rules at the beginning of the day and review your trading at the end of the day. If you followed your rules, even if you lost money, pat yourself on the back. If you didn’t follow your rules, then mentally rehearse what you did and give yourself more appropriate choices in the future.
~ Dr. Van K. Tharp
TradingSafer.com 