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upset or mad at yourself. I would suggest only doing these exercises when you are in a relaxed
state. Trying to do them when you are aggravated will not get you anywhere and will simply turn
you off from continuing to do them in the future.
If you ve had a bad day, I would suggest giving yourself some time before you do the
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exercises. The term time heals all wounds is very true here. If you give yourself some time to
calm down (a day, an hour, whatever), you will be in a much better position to relax and then
really get some benefit from these exercises.
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Chapter 31
LIMITING RISK EXERCISE
As we ve learned throughout this book, limiting your risk whenever possible is really the
key to successful trading. Most people don t realize this when they first start trading. They think
that just finding winning trades will make them rich. But if you ve been trading for any extended
period of time, you know nothing could be further from the truth.
The key to thriving is to stay out of trouble and avoid big losses while protecting your
winning trades from turning into losing trades. Without this skill, all the winning trades in the
world aren t going to help you in the long run.
I guess the real problem comes because most people don t learn this until they ve already
learned bad habits that are difficult to change. For most people, they realize they must take a
defensive position with their trading, but they don t realize soon enough. In fact, when they
finally do learn that they need to be protecting themselves, they ve usually acquired poor habits
that conflict with the idea of protecting themselves.
I ve come across thousands of traders. Unfortunately, many of them have the same
problem. Because they ve been beaten up so many times by the market, they get very, very,
greedy when they do get a winning trade. In fact, they are so greedy they do very little to protect
the winning trade they re in at the time. It s not as if they don t know they should be protecting
themselves (by trailing a stop order to protect profits or locking in a break-even trade if the
market goes your way). They know they should be taking a defensive posture (in other words,
limiting their risk in every way they can), but their greed and bad habits override what they
should be doing. And, of course, it s no surprise that these people turn large winning trades into
large losing trades.
Without changing those bad habits, it will be impossible to succeed. The greed makes
you not protect yourself. But being greedy is not in your own best interest. In fact, just the
opposite, being greedy is in the best interest of other traders out there because if you are greedy,
you will simply give your money to them. There is very little chance of holding onto it.
So we need an exercise to help us protect ourselves by limiting our risk. Thus, we will
consistently act in our own best interest and not be greedy. My guess is if you are constantly
turning your winning trades into losing trades, you aren t acting in your own best interest, and
this exercise can help you change those bad habits.
EXERCISE
1) Get in a relaxed state with the relaxation technique Calm Body, Calm Mind.
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2) In this visualization exercise, we want to mentally practice trailing our stop orders to lock
in break-even and profitable trades. It is very important to take a defensive posture when
trading, and this exercise can help us learn to make that a habit. In other words, we want
to learn to Stay Out of Trouble. (This is a term used on the trading floor that means a
trader is having a bad day, but he is still acting in his own best interest. In other words,
even though he is having losing trades, he is not losing too much money.)
3) Just like in the previous exercises, we want to visualize some trades in the past where we
were successful. Hopefully, you can remember some trades where you did trail your stop
order to lock in a profit and you were successful in doing so. Remember the details (as
much as possible) of those trades and relive the winning feelings you had. Play those
trades back in your mind realizing that you were acting in your own best interest by
protecting yourself and your profitable trade.
4) If you can t remember a trade where you trailed your stop order, or if you haven t had any
trades like that, then you ll need to make them up. Remember to use as many details as
possible and to feel how you would feel if you were acting in your own best interest and
having successful trades. It will help if you can get some confident feeling first by
remembering a time when you were confident (even if it s not related to trading).
5) The next scene you want to see in your mind s eye is you getting into a trade that you
perceive as a good opportunity. Again, it s easier if you can remember a previous trade
(thus, it s easier to remember and see the details if it was a real situation). But you can
always use an imagined situation if you don t have a real one. See yourself getting into
the trade by placing the order and your protective stop order (you should always be using
stop orders in my opinion). Again, with details, see yourself watching the market. What
does the computer look like? How does the mouse feel in your hand? What else is
around you, a phone, keyboard, printer, hard-drive, etc. See the details.
6) The next thing we want to see in this little movie is the market starting to move in our
direction somewhat. As that happens, we pick a point where the market should move and
then we will trail our stop to break-even.
7) When you trail your stop to break-even, make sure you see in your mind s eye everything
you would do to trail your stop. See yourself calling up and cancel-replacing your stop
order. See yourself clearly scratching out the old price of your stop order and writing the
new price down.
8) If you trade through your computer, then see yourself touching the keys to move your stop
order to break-even. See yourself hitting the correct button to transmit the order. Do
everything in your mind just like you would in real life.
9) Now switch to the next scene in the theater of your mind. Now we want to see the market
continuing to move in our direction. Let s say for discussions sake that the market has
now moved $800 in your favor. In your mind s eye, see the market having moved $800
your way on your chart. You don t want the market to come all the way back and take
your profits away. So you need to trail your stop to lock in some profit.
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10) See yourself trailing your stop to lock in half your profit. See yourself picking up the
phone to cancel-replace the order again. See yourself scratching out the old price again
and writing in the price. Was there a new order number? Mentally write that down too.
11) Now see the market coming back and hitting your stop order. See yourself taking a nice
profit because you acted in your own best interest. Feel those winning feelings, and get
ready to move onto the next trade.
One of the most important things you can think about (and get into the habit of thinking
about) is the previous trade is now over. No matter what happens next, that trade is over and it s
now time to forget it and move onto the next trade. Many people get caught up in the idea that
they should have done this or that differently. At the end of this visualization exercise, you
should see yourself effortlessly forgetting about the last trade (no matter what happened), and
move onto the next trade. The next exercise will help you forget about your previous trades.
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Chapter 32
CLEARING THE CALCULATOR
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