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It was a muggy day and I couldn't seem to do anything right. I fumbled around all morning. He hadn't slept the previous night. I was tired, and was tempted to just quit for the day, drink some ice-tea, and sit in a hammock by the pool. But I still had enough willpower to fight temptation a little longer. I had been working on a trading plan for the past month and I wanted to see it through.

The day's market conditions were just right. I wanted to execute the trade that day, a day I had patiently been waiting for the whole month. It was a day like that day that I was glad that I had prepared beforehand for what could go wrong. I might not have been at the top of my game at that moment, but I knew that I could survive a worst-case scenario should it have happened. I had taken precautions and knew deep down that I could live through a major setback. So even though it was a tough day, I decided to stick with my plan, execute it, and see if I could take home a profit.

When it comes to mastering your psychology, feeling safe and protected can do wonders. If you are truly afraid of making a mistake, you will not feel calm and relaxed. You'll be on the verge of making a trading error. And when you are under extreme pressure to perform flawlessly, you feel it. There's an old trading adage that is apt to trading in the calm, calculating state of mind: Make the trade so insignificant in the big scheme of things that you wonder why you are even bothering executing it. Managing your risk is the key to cultivating an unwavering, psychological sense of safety and security. If a trade requires you to risk only a relatively small percentage of your account balance, you'll feel at ease. You'll know that you can survive a setback, and you'll think, "What do I really have to lose?" I can relax a little and see what happens.

There are other obvious ways to feel protected and safe. For example, you can use a protective stop to make sure that you restrict the amount you can lose on any given trade. Look at the past performance of the underlying and estimate an ideal stop loss point that protects you, but does not allow you to get "stopped out" too early. Once you've determined an optimal stop-loss point, use the automatic settings on your trading platform to ensure that you are protected even when your self-discipline fails you. Perhaps the most important form of protection, though, comes in the form of a well-developed trading plan. If you know specifically when to enter and when to exit, you can execute the plan even while feeling a little stressed out. You can mechanically follow your plan, focusing on your immediate experience rather than the long-term consequences of a trading loss. It's also important to anticipate adverse events as part of your trading plan. Make sure that earning reports or a Federal Reserve speech, is not happening while you anticipate placing your order in the market.

Just like engaging in a dangerous sport, you feel better when you know that you have some form of protection. Athletes protect themselves with helmets, and airbags and seatbelts protect us as we drive in rush hour traffic. Successful trading also requires adequate protection. Protection not only ensures that you can survive to trade another day, but it also allows you to feel relaxed while you execute and monitor a trade. So protect yourself. If anything can go wrong, it usually does. You don't have to worry, however. If you take precautions, you'll survive the inherent setbacks in trading, and end up winning in the long run.

Ah! I know you are wondering how the trade came out. It worked out very well, and was never in serious trouble!

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Thursday, 13 June 2024

Derivative transactions, including futures, are complex and carry a high degree of risk. They are intended for sophisticated investors and are not suitable for everyone. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, and all of which can adversely affect actual trading results. For more information, see the Risk Disclosure Statement for Futures and Options.