Trading (and life) is all about decisions.

One of the keys to avoiding regretted decisions is to have a rule of thumb in hand for any prospective decisions that you encounter.

Now investing in your trading business is a necessary part of being a trader, and you really need to make sure that you invest wisely.

We’ve all bought something that at a later time wished we hadn’t, for example an expensive piece of software or a fancy trading system.

Here is a rule of thumb that you can use when presented with a tempting offer:

If the price is greater than the amount you could comfortably lose on ONE trade, sticking with your risk management rules, then you really need to weigh both the prospective gain (in dollars) from getting it along with the LIKELIHOOD that you’ll realize that gain.

If it costs substantially more than what you’d risk on a trade, consider the matter thoroughly before acting on the impulse to buy it.

Here’s an example to illustrate.

Say you’re looking at a piece of software that costs $1,000 and your available funds are $10,000. That’s 10% of your working capital.

If your risk management rules state that your maximum risk is 5% max, then that’s $500. This software is twice that.

Now ask yourself, “Is this software REALLY going to solve my issues, my real NEEDS at this time?” Have you already mastered your current software and outgrown it, where it just won’t do what you NEED to make money?

If you HAVE mastered your current software and it IS holding you back from improving your bottom line, then is this one that you’re considering the BEST solution available, both in terms of money and meeting what you NEED to accomplish what you want?

Or if you HAVEN’T, does this prospective one just sound great, and part of you is hoping that you’ll do with the new one what you didn’t take the time to do with your current one?

Maybe subconsciously you’re hoping that you can just skip the uncomfortable ‘work’ of developing proficiency with this new software?

If the answer is “Yes” to these last two questions, then perhaps you should pass on the purchase, and focus on what you REALLY should be doing to make your trading more profitable.

On the flip side of this coin.

If the investment you are looking at IS within your risk management rules and you really feel that it WILL have a positive return for you, then simply make sure that you take action to ensure that you do indeed get the benefit from it.

Just like with any trade trade, if it doesn’t fit within your rules, perhaps you should pass. There will be another opportunity.

As the saying goes, “There’s another bus right around the corner.” If it DOES fit within your rules and moves you closer to your objectives, act decisively and realize the returns.

Your decisions are yours to make of course, and I hope this rule of thumb saves you some stress and wasted time and money. It’s not set in stone, just a rule of thumb for handy reference that I’ve used along the way.

Cheers

Brian

P.S. Most of the decisions in trading are pretty easy once you reach the professional level. Get the right trading training and take your trading to that level in as little as just six months. Go to http://insideouttrading.com/pit/