The only way a trader is going to make money is to put money on the line and risk losing some of it. It’s the very nature of the business but not one that anyone finds easy to cope with as the inherent risk is stressful and most people are risk adverse.
However we have to take risks in all aspects of our life, every single day. Driving the car, flying, going down stairs, riding your bike, you name it, there is risk associated. We have all adapted to managing the risk by putting our seat belt on, using protective clothing or accessories and approaching the task in a sensible fashion such as driving at a safe speed.
This is how you should approach your trading and ensure that you have proper protection in place. The markets will throw all sorts of obstacles your way and forces will appear to directly work against your trading plan. Just look at the past few highly volatile weeks!
There is no getting away from risk when you are a trader, indeed it is the risk that gives the potential for profit. If we aren’t able to cope with risk then we can find ourselves getting frozen, paralysed by fear and backing off from the trade. So what do you do?
Well on each single trade, the risk management process ensures we limit the exposure to one that we can afford and therefore should be one we can manage psychologically. Therefore approaching your trading with one trade at a time provides a good method for managing potential for reward and loss and enables you to keep greater perspective and the ability to trade in a more assertive fashion. That alone will help potentially deliver greater profits.
When trading, you also have other methods for managing your risk and putting protection in place that limits your losses and ensures you retain a clear head. One such tool is the ‘protective stop’. Analysis of performance and price fluctuations provides an idea of where to set a stop such that you protect your overall risk but without exiting too early.
However you will never take away from the protection that a detailed trading plan provides as it identifies all aspects of trading including entry and exit points. This then frees you to simply follow the plan without getting caught up in the emotions of the ebbs and flows of the market. So your fear for the future is lessened and all you worry about is the current trade. The plan must be designed to be robust enough to cope with adverse events thrown at you such as earning reports and left field bad economic reports like the recent Chinese slowdown.
Road cyclists don’t even think about not wearing a helmet, rally drivers wear helmets and seatbelts, mountaineers wear a harness and all of them consider it a part of their equipment to allow them to perform at their maximum.
For the trader, the risk management gives the assurance that one loss won’t wipe you out and it also provides the freedom to just trade. To find an opportunity, plan it and then execute it all in a relaxed fashion increases the potential for success. There will always be setbacks and losses that weren’t expected but managing risk means that the long term is more likely to provide a positive outcome of desired profits.
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