Early in my trading career I always thought in absolute terms. Today I made $500, yesterday I lost $1000. The price of the stock went up $2.00, etc.
This is fine and dandy if you’re trying to calculate the price of your mortgage payments and insurance bills. However, in the world of trading – where the name of the game is to compound your capital year-over-year – the effectiveness of thinking about things in absolutes will hinder your ability to correctly trade your account.
You’ll start thinking about the things you can buy and how you will spend the money you’ve earned. Because now that there is an emotional tether connecting your trading account to your happiness, I know without a shadow of doubt that you’re exuberant when your PnL goes positive for the day and flabbergasted when it dips in the red.
Rather than thinking in absolutes, try adjusting your mindset into a percentage based one. This will help you disconnect your emotional ties with the market.
The added benefit is scaling. If you use a fixed amount to trade then you might not be growing in trading size as your PnL head upwards. However, using a percentage based system, your trading size will grow in accordance with your Net Asset Value.