Moving the Decimal Point

It is human nature equate a dollar figure with something relatable in your experience; my cable bill is $100, my rent is $1,500, and $30,000 is how much I make per year cooking fries at McDonald’s. So it is very easy to look at your profit and loss and say to yourself; “I just made car payments for a year!” Or “I’ll have to cook fries for 7 years to make that loss back!”

Your net liq changes based on the same percent that your investments perform. So if your stock goes up 10%, then the portion of you account at risk goes up 10%, no matter if that was $500 or $5,000,000. If you want to avoid the roller-coaster of emotions that can infect your trading decisions and stress level, you’ll need to compartmentalize the dollar figures you’re working with.

You can look at the difference between $500 and $5 million as the difference between a car payment and your life’s total earnings, OR you can disconnect from the charged meaning of that dollar figure and simply move the decimal point over 4 places. Some will find that easier than others, but a trader’s success hinges on emotional stability.

“Only risk what you can afford to lose” and “Trade small, trade often” are both great advice to manage risk, but not effectively managing emotions can undo even to most careful of traders.

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