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TRADING NAKED

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the interpretation and application of price action concepts

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We all share a similar path in Trading. Even though you may not be a consistently profitable trader now, you can chose to enjoy the path. This alone may make the difference in your success.


 
 Mind Over Markets TM - February 9, 2005
Take calculated risks. That is quite different from being rash.    
- Gen. George S. Patton -                 
Feature Article

Always Manage Risk

There's nothing more thrilling than anticipating the markets and making a huge profit off of a trade. Not only do you feel on top of the world for getting it right, but the feeling of security from realizing a windfall is nice too. After a winning streak, it's tempting to let lose and start making some big trades. Although it is often useful to take advantage of a hot streak when you hit upon one, it doesn't mean that you should act recklessly. It's essential for long-term survival to maintain discipline and manage risk.
After making a series of winning trades, it's tempting to celebrate. You may start thinking, "What do I have to lose? I'm far ahead of the game. I can take a little more risk." But it is essential that you fight the urge to trade impulsively and maintain discipline. What is the harm of taking big risks? You really don't know that your next set of trades will be wins, and 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, though. 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 act impulsively or don't continue to manage your risk, you'll tend to give back all your profits and more. It's vital for your long-term survival to continue to manage risk, even after a long string of successful trades.
After making a series of wins, it's natural to feel a little elated, high, and invincible. One may not fully consider the realistic possibility that a losing trade is on the horizon. It's vital that you are a little skeptical, though. It's nice to feel you are running hot, but it's important to remember 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 setback, so it's wise to always be ready for a potential loss. Many people react to unexpected losses with extreme emotion, which may cloud one's judgment, and produce trading errors. 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.

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