Written by Katie Gomez

We live in a generation of information overload.  We are inundated with an unlimited pool of information. This overload makes learning a new skill (like investing or trading) even more challenging because we have no idea where to start. Although it may seem impossible, we can break down the necessary information into more digestible, less overwhelming chunks. This process of chunking or compartmentalization is especially crucial for newer traders because there is so much to learn. The only way to do it right is to break down the game of trading, one bite-sized topic at a time. 

This learning process will not only give you the necessary tools it takes to be a successful trader, but it will also build your confidence as you master each step. This process will require patience as it doesn’t offer the immediate gratification you could receive by paying someone else to trade for you, but it will be more rewarding in the long term. In this article, I will review this process and explain how compartmentalizing your trading journey can help lead you to success. 

Investing is a hard enough task on its own, but stock traders have to juggle numerous different things at once to find success. Compartmentalization is an essential concept in stock trading that involves separating various aspects of your trading activities to help manage risk and make more informed decisions. This process of chunking information will also help you avoid some common mistakes traders make. 

Compartmentalizing also allows you to practice mindfulness, an essential trait for success. Although multitasking has become second nature for most of us in the age of technology, our brains are not meant for the extreme information overload it endures. When our minds become overstimulated, our critical thinking skills suffer, thus leading to poor decision-making. In short, an overstimulated, overworked mind is incapable of practicing mindfulness. 

It’s no wonder traders make impulsive, regrettable decisions. We have to multitask, t’s part of the job. The amount of information a trader consumes in moments is alarming, from P&L numbers, order entries, level 1 quotes, level 2 time & sales, simulated trades, real trades, candlestick charts, stock races, news articles, etc. The sheer amount of tabs alone could send anyone’s brain into overdrive. So how are we supposed to make clear, well-informed decisions while trying to comprehend the overwhelming load of information traders need to keep an eye on? Here are some ways compartmentalizing can help make those tasks seem less daunting. 

Risk management:

Managing risk is one of a trader’s most crucial daily tasks. A great place to start compartmentalizing this task is by separating your trading capital into different portfolios. This diversification allows you to keep track of your funds better and thin out your levels of risk. 

It is essential to diversify over time as much as possible to maximize your investment efficiency. In addition, diversification will optimize your portfolio and lessen your fear of loss by not risking all of your capital in a single stock.

Another way to compartmentalize your risk is by categorizing or segmenting the market into different sectors to focus on; traders become better equipped to tackle them one at a time. 

Traders get overwhelmed when they try to invest in every financial sector at once (the housing market, meme stocks, banks, oil & gas, precious metals, etc.). This is why you should utilize the top-down approach to which stocks you want to focus on will help you simplify your trading. Over time, you will become familiar enough to diversify your portfolio across market sectors, but you must start incrementally to avoid panic.  

Risk / Reward Assessment: 

Learning how to manage your risk may take time and effort for a trader, but compartmentalization helps you evaluate the risk/reward potential for each trade or investment. When developing your risk/reward ratio, you will experience a period of trial and error to determine how much money you can afford to risk. 

That said, compartmentalization helps you stay organized while focusing on different tasks, such as setting specific targets, portfolio fund allocation, stop-loss levels, and risk parameters for each trade to understand the potential gains and losses; thus helping you make more informed decisions and manage your risk effectively. 

Risk limitation: 

Separating your trades into separate compartments can also help you prevent potential losses by learning to create specific limits and predefined parameters for your risks. By setting these boundaries and sticking with your trading plan, you can trade more consistently and better control your risk exposure. Compartmentalization is a proactive risk management approach that prevents excess losses. For instance, if one of your stocks surpasses the predetermined risk limit, you can mitigate further loss by adjusting your funds or exiting the position entirely.

Psychological discipline

Traders can also learn to compartmentalize or regulate their emotions by reflecting and reviewing individual trades to see what causes us to react impulsively by buying or selling. Emotional or psychological discipline is a part of trading that even the most experienced traders still struggle with, so this may take some time to get comfortable doing. We can either continue to let our emotions control us or learn to break them down, understand them, and work with them instead of against them. 

The best way for traders to learn and grow in the same way you would have to eat an elephant, one bite at a time. The world of trading tends to scare away many people due to the sheer overwhelmedness it produces. However, if you can get past that initial shock and break it down, you can conquer trading, like any other skill. We all have the potential to surprise ourselves and make money in the market; it is just not a linear journey to get there. Unfortunately, the stock market rarely provides immediate gratification but rewards those with the patience and stamina necessary to stay in it. 

Visit Trade Ideas today to start simplifying your trading journey with compartmentalization today. 

References 

https://www.avatrade.com/education/online-trading-strategies/risk-management-strategies