Managing Risk, A Traders Secret

As traders there is probably nothing more thrilling than correctly anticipating the markets, or a particular stock, and making a huge profit off the trade. You feel on top of the world. After a good winning streak it’s very tempting to let loose and start making some big trades, after all you are invincible, well at least for now. Although you should take advantage of a hot streak when you come upon one, you must avoid acting recklessly, it can destroy you. I have personally seen it too many times, the “BIG idea“.

Because we are hot and we sense a big move coming, instead of following our plan, our proper position size, we decide to risk it all. We buy as many shares as we have dollars in our account and margin it as well. The market goes against us but we feel OK because we are hot and we know we are right. The market will soon realize that we are right. I don’t have to finish this because you know where it leads at least I hope you do. Even when on a hot streak, you must, for long-term survival maintain discipline and manage risk.

After making a series of winning trades, you want to celebrate, and you should. However avoid thinking, “What do I have to lose? I’m far ahead of the game. I can take a little more risk.” What is the harm of taking big risks I’m way ahead? The problem, you really don’t know that your next set of trades will be wins.  When you take unnecessary chances, it’s as if you are working under the assumption that you will tend to win in the future. No one has a crystal ball! Trading is about taking advantage of probabilities. From the perspective of probability theory, it’s possible that you will continue to win, and by making larger trades and lowering your limits, you’ll reap big rewards. But in all likelihood, the next series of trades may be losers. If you don’t continue to manage your risk, you’ll tend to give back all your profits and more.

Fully consider the realistic possibility that a losing trade is on the horizon. It’s important that you maintain a little skepticism. It’s nice to feel you’re  hot, try and remember though, that your hot streak may end as quickly as it started. Never let your guard down. Always be prepared for your luck to change. An unexpected defeat is often more devastating than an expected probable setback, always be ready for a potential loss. By remembering that a loss is always possible, and that it isn’t a big deal, you’ll be prepared, and won’t be fazed when it happens.

Managing risk is a trader’s secret weapon. Don’t take unnecessary chances. Trading is a game of survival. Sure, you must make big profits while you are running hot, but you must avoid mounting huge losses when you are running cold. Don’t be caught off guard. Consider every possibility. Continue to manage risk. It can go a long way in helping you stay profitable in the long run.

Enjoy a wonderful weekend – You’ve earned it!

ETF Range Projections & A Quote to Start the Day

As we look ahead into the next century, leaders will be those who empower others.

-Bill Gates

For more detailed economic data click “Today’s Calendar” in the navigation bar to the left.  

Overseas market are ending the week on a positive note: Nikkei 225 +1.23%, Hang Seng +1.29%, Shanghai -0.15% DAX +0.81% and the FTSE 100 +0.80%

At about 7:10 AM ET, ahead of the CPI and on Quadruple Withchinf Friday the futures are looking nicely higher: Dow +82, S&P +11, NAZ +18, Oil +$0.56 and Gold +$7.60

have a great day!