“In the market, the fear of losing one’s fortune is every bit as intense as the fear of losing one’s life from an attack by a wild animal. I don’t think I could put the difference between consistent winners and everyone else more simply than this: The best traders aren’t afraid.” Mark Douglas – The Disciplined Trader.
Scared Money is, simply put, money that you should be using for something else other than trading. This might be groceries, it might be a mortgage payment or it might be your child’s scholarship fund. This money has no business being in the market. If it is, you’re so scared of losing it that your judgment is clouded when it comes to any trading decision. Without a neutral state of mind, you’re often going to be late catching the move or exit too early.
How does one avoid this? The money you trade with has to be set aside “risk capital”. This is the amount you can trade with because you’ve accepted risking this money. You know that no matter what happens to this money, you’ve met your obligations elsewhere and nothing will change with your day-to-day if this money is gone next week.
Does that mean to trade with reckless abandon like so many traders do? Absolutely not. However, without fear in your trading you can focus on what matters most, trading. Implementation of your trading strategy, plan and money management discipline can only become second nature if you’ve overcome the fear of losing it all.