Friday, October 28, 2011

Resist the Lure of High Risk – Part 3


“Of all the hundreds of traders I have met over the years I only know a handful that still trade and make money year after year. All those traders without exception have strict money management principles and a simple method or system. Don't be in a rush to make it in trading. You need to learn this profession. You need to have money management principles in place that allows you to stay in the game even when you go through a bad patch and trust me they will come.” - Mark McRae


Can you stomach big losses? Taking big bites will ultimately result in taking big blows on the account you opened with your hard-earned money. Anyone who expects huge returns in a short time isn’t psychologically prepared to be a permanent victor in the market. You may see a title like this: ‘How To Make a Million Dollars in 40 Trades’, but this is tantamount to how to receive a margin call in 40 trades. Someone who’s showing you how $200 was turned into $5000 in one month is, in effect, showing you the quickest route to a margin call. Just as an automobile can be wrecked if driven carelessly, your trading portfolio can be ruined if you use large position sizes to achieve huge profits. Thus, when a trader mismanages his portfolio, he easily experiences big losses. Many traders would be better off if they just stopped doing that.

What do you believe? Why is it that big roll-downs, headaches, outbursts, and abrupt end to careers run rampant throughout the trading world despite warnings from professional risk managers. Why is it that many traders seem to be dashing headlong into self-destructive course, turning a deaf ear to repeated warnings? It’s of no use talking to deaf people. But I’d continue blowing my horn, perhaps some traders out there may hear.

Using low position sizing isn’t easy because we live among people who promote the use of high position sizing and think that risk control is cowardly. Many unwary traders yearn for the kinds of gargantuan results flaunted by vendors. On an individual level, many are tempted to crave the trading results that are beyond realities. This can be a trap. Some of the trading results flaunted by the vendors aren’t genuine either. Why follow someone else in their irrationality and end up in financial trouble?

Many of the most successful traders in the world don’t seek to double their accounts in a short period of time. Nevertheless, they find satisfaction in slow and steady growth of their accounts, which go alongside strict application of safety measures. Like those who use small sizes, if you ‘seriously stop going after big profits,’ you too can enjoy that consistent survival. You’ll see how you’d be unaffected by bad markets, being immune to the damage the uncertain markets can bring.

Some speculators have experienced profound disappointments but have improved their trading results by choosing to follow safety rules in trading. Although it was very difficult, I did away with anything that encouraged the use of high risk in trading. Yet the temptation stayed in my mind for a long time. Whenever I happened to see an advert that shows how, for example, $500 was turned into $20,000 in 6 months (with a supposedly magical entry system), I immediately thought of my past experiences. I didn’t want to mix those unpleasant memories with everything good that was now taking root in my heart and trading experience. So I intentionally avoided those who promised the moon and the sun. And whenever I was tempted to become greedy, I stayed away from trading until I came back to my normal senses. Doing so helped me to experience the survival and consistent profit that follows it. I see the damage that high risk does, and I want no part of it. The trading principles that work have helped me realize that my dream of consistently huge profits in short periods of time was connected with fallacies practiced by unwise traders. This kind of dream has little permanent value. I’ve witnessed how those who constantly targeted huge profits have experienced bitter disappointments in their trading careers. Seeking a way to double your account many times in the shortest time possible is the fastest way to ruin your trading career. One the other hand, I’ve found the greatest aim in trading – capital preservation.

Traders need an end to big losses and margin calls. Risk less to make more, risk more to make less. Whatever the case may be, be modest and realistic about what you do as a trader, and make your decisions with risk control in mind (in case the market goes against you). Being a carefree high-risk taker can be addictive and can lead to heartache. So work on being a cautious and prudent speculator, which can put you in a position to enjoy permanent success in the markets. You can be a permanent victor on the battlefield of the financial markets. You can gain several benefits by following risk control principles regarding trading activity. You’ll avoid the harsh consequences suffered by gamblers.

We need to adjust our trading viewpoints to align them with safety measures because that’s what can protect our nerves. Risk control measures protect the portfolios of those who employ them. These measures prevent them from doing things that can jeopardize their trading objectives and survivability. A portfolio trader thinks about the total value of his portfolio rather than the success or failure of the individual trades on it, and as such, he approaches trading in a different way than just being concerned with picking a winner every time.

There are many effective trading strategies. The most common element to all successful strategies is good money management. Availability of risk management is a privilege and part of successful trading. Since we aren’t sure of what the market will do next, we should always remember to apply risk control before trading. Beware of greed. Find contentment by going after small but consistent profits. In one of my coming articles, I’ll explain clearly how risk and money management may be effectively applied to trading strategies. These suggestions can help you avoid big losses and/or margin calls (moving ahead consistently in the markets) but only if you put them into practice. This is the best thing you could ever do in trading. But if you could do it, the rewards are commensurately greater. I implore you to partake in the benefits that come to those who control risk.

This article is concluded with a quote from one funds manager who also takes risk control very serious:

You might wonder why our equity long/short strategy is aiming at relatively low annual return of 15% at most. On the one hand this is due to the fact that major investors don’t like to lose a lot of money. As funds being managed may belong to some individual investors, capital preservation is the prime target. And it’d behoove funds manager to behave accordingly. Nevertheless, astronomical returns are rendered impossible…”

NB: Please watch out for my coming articles with these titles: ‘How to Identify a Sideways Market – Be Safe!’ ‘A Negative Expectancy System – Pushing Against the Wind?’ ‘The Most Important Trading Skill – Who’s a Winning Trader?’ ‘Recent Market Conditions (The Most Difficult Aspect of Trading),’ ‘An Intraday Moves Catcher – A Wealth Generating System,’ ‘Unlock the Power of Everlasting Triumph in the Markets (Parts 1 - 12),’ ‘How to Handle Uncertainties in the Markets,’ ‘The Issue of Stops (Come Back! Oh Come Back!),’ ‘A Hedge Funds Strategy,’ ‘My Hedge Funds Strategy Update,’ ‘Experiment with Different Exit Tactics,’ ‘Mastering the Market Equilibrium Zones – A Time-sensitive Method,’ ‘How I Apply Risk Management – Part 3,’ ‘A Simple Positive Expectancy System – Trading Effortlessly,’ ‘Testimonies from My Subscribers,’ ‘Resist the Lure of High Risk – Part 4’ ‘Worst-case Scenarios – Facts Are Sacred,’ ‘Effective Swing Trading in Forex,’ ‘Gap Trading Revisited,’ ‘3 Recent Gap Trades,’ ‘Developing the Right Attitude towards Losses – Part 4 (Losses Aren’t Abnormal) ,’ ‘The True Holy Grail – The Long Sought for,’ ‘Suicide Trading Techniques,’ ‘Forex Trading Vocabulary,’ ‘ Clarifying Some Issues – Part 5,’ ‘Navigating Turbulent Markets – A Double Timeframe Analysis,’ ‘Optimization of the USDCAD Hedging Strategy – Bringing the USDCAD to Subjection,’ ‘Overview of My Signals Strategies,’ ‘The Cost of Discipline,’ ‘Monthly Market Review,’ ‘Uncertainty Has Become My Ally – An Interview with a Dogged Market Speculator,’ ‘2 Examples of the USDCAD Hedging Trades,’ ‘Monthly Trading Report (November 2011),’ etc.

Your questions and opinions are highly welcome.

Thank you.

With best regards,

Azeez Mustapha

Forex Signals Strategist, Funds Manager &Coach

Senior Analyst

FX Instructor, LLC


Yahoo! Messenger ID: saazalmu

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NB: There is risk of loss in trading, but it is possible to be a successful trader.

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