Trading Tip #28: Know Your Limits

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One thing that I see that catches traders up all the time is knowing their limits. There are times when it is probably wiser to step away from a trade or not trade at all.

 

Sometimes the best favor you can do for yourself is to take a break.

 

It doesn't matter who you are or what kind of trading you do. There are going to be times when you need to step back and take a break from things. This can happen after a bad trade, a big loss, and even after a really good performance. It can help you get things back into perspective. It also allows for an opportunity for you to review your trades, and learn from any mistakes or plans that you think cost you in the long run.

It is easy for traders to get caught up in the action.

A lot of amateurs find themselves getting swept away in the wave of enthusiasm. The trading highs that come with winning are just as strong as the pull of panic that can accompany a loss. It is up to the individual trader to look at themselves in the mirror and admit when passions and emotions, rather than common sense, are at the helm.

 

Huge market movements like those that come on the waves of spiking prices are often irresistible. The trouble is that these times of high volatility can sabotage careful trading plans. Remember that there is no circumstance under which it is wise to enter a trade without a solid plan that includes:

 

- specific entry points based on your analysis

 

- specific profit exit level

 

- specific loss exit level

 

Even at the best of times it can be an exercise in patience and risk tolerance to trade. You don't want to muddy the waters by trading during extreme market events until the complete macro picture is available. An example of the kind of action I am talking about is relative to the panic over debt issues. When news is trickling in 24 hours a day from Europe and the United States, or when a big ratings agency decides to lower a AAA credit rating over the weekend, you can be sure that there is an environment where markets can gap through your stop prices or leave you very vulnerable. Trading in futures is risky enough without adding that level of anxiety.

 

Every time you trade you should ask yourself what is motivating you.

 

Before you enter any kind of trade you should ask yourself what you are looking for. Are you following a solid plan based on careful analysis and rules? Are you making sure you are only using risk capital? Can you really afford the loss if the market moves against you? Are you just trading to "be in the market"? Understanding the answers to these questions and being honest with yourself is important. These aren't just warnings to pay lip-service to. There are substantial risks of loss in all trading, and that's why you have to know and respect your limits. It is always ok to sit things out. No one ever loses money by staying on the sidelines and out of trades in a volatile market.

 

Best Trades to you,

 

Larry Levin

Founder & President- Trading Advantage