How To Protect Yourself When Making a Trade

Jared F. Martinez (The FX Chief™) is an author, forex mentor, educator, market analyst and entrepreneur, as well as the founder of Market Traders Institute, Inc. (MTI). (Learn his strategies for trading success.)

Quantifying emotional stop-losses are equally—if not more important—than placing the actual financial stop-loss orders. Emotional losses can take a larger toll and can create more long-term emotional scars than the actual financial loss.

Any type of business involves risk, and trading in the markets is no different. Successful trading is about quantifying the amount of emotional heartache, abuse, or grief that you are willing to take should things not work out. It is drawing a line of tolerance in the sand, which allows us to manage the emotional and financial risk levels that accompany the perceived investment.

When we get blind-sided, or incur a life-altering blow, and fail to properly protect ourselves, our financial life—and even our quality of life, can be damaged for years. The toll may be greater than we ever anticipated. It can affect our attitude, ego, emotions, financial security, marriage, and even our destiny. One thing for certain is that it will create an emotional scar that may take years to recover from.

I believe that when people take the time to think before they act, they are taking the first step to protecting themselves. Turning the following four simple steps into daily habits can change your personal, financial, emotional and trading life forever. These habits can help in teaching you how to protect yourself with everything you do before getting involved. And, the following four steps may even help you avoid years of grief!

Four Simple Steps for Protecting Yourself as a Trader

1. Look at what you have and ask yourself, “How can I protect what I have from any loss or retain as much as I can if this opportunity does not work out?”

The first question while investing must always be, “How can I preserve my initial investment should things go against me?” The first question while entering into any relationship must always be, “How can I preserve my existing relationship with this person should things start to get emotional between us?” Believe it or not, emotional and personal relationship setbacks are usually greater than financial ones.

2. Before you get involved, think through the worst situation that could arise if things do not work out as planned.

Do not be optimistic and expect the best-case scenario. We all seem to naturally know how to act when everything is going great. It is when we have to work through the worst thing that could ever happen that we need to think through things well, and be very clear as to what we will do. Just as every building must have a fire exit, we need disaster plans in our life to protect us.

3. Create a plan that defines the terms and conditions of the opportunity. If you fail to plan, you plan to fail.

Every success is preceded by executing a well-thought-out, logical and sound plan. When you make your plan, use the “if . . . then” approach. Successful people have plans in place that say, “If this happens, then I will do this,” and “If that happens, then I will do this,” and “If that doesn’t happen, then I will do this,” and so on.

Life is a game of chess with incredible variables—and trading too has just as many. You need to be prepared for the unexpected surprises in life. If you are prepared for the unexpected, then there are no unexpected surprises, only a continuation of your plan.

4. Prove to yourself that your plan makes logical and financial sense and that it is the best thing for you and your loved ones.

Step back and ask yourself why you are getting involved. There are millions of opportunities in life and twice as many when it comes time to trading. When you learn to create a trading plan and follow it, you have a greater chance of success as well as really enjoying what you are doing. Your plans need to be logic-based, not emotion-based.

You are not protecting yourself if you take advantage of an opportunity without creating a sound plan with timelines, milestones, and stop-losses along the way. Know when to get out when it is time for you to get out. You cannot afford to stay in the building when it is burning to the ground.

When you begin to implement these four steps and allow them to become a part of your life and daily habits, they will save you incredible amounts of money and/or years of grief in many areas of your life. And, when applied to trading the Forex, adopting the habits could pay huge dividends. So, remember to protect yourself at all times and never risk more than you can afford to lose.

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