Archives of “risk management” tag

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Mental Toughness

  
  Education
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The mental part of the game. Its an aspect of trading that can easily be ignored, we all choose how we approach this game. Some see failures as opportunities to learn and progress, while others see them as outright failures and road blocks which should be avoided at all costs. Its all about attitude. 
 
I feel that trading should be ‘easy’ It should be effortless and without conflict. If we are going to be in this game for 20+ years. I feel its important to make the experience as easy as we can. We shouldn’t be ‘fighting’ with the market, in the boxing ring, hoping, fearing and stressing. 
 
There is RISK management, but SELF management is equally as important. When we are actively trading the market, we are free to make buy and sell decisions whenever we want. The tough part is consistently making the correct buy/sell decisions. These decisions come with conflict!
 
 
Taking Profits

So this is the hardest part of trading. It can be made simple if we accept a few hard facts. 
 
1. You will never sell at the top. 
2. Your going to be wrong when you sell. 
 
This is fact. As soon as you sell, the stock will probably keep going up. You may look at it 5 months later and its up 100% since you sold it. Point is, when you sell, your probably going to be wrong. This creates a conflict. 
 
As humans, we do not want to be wrong. We seek perfection, we want to nail the top! It can help explain why people run up stocks 20% to watch them come all the way back down to break even. The reason why they did not sell is because they are afraid to be wrong. By selling you are forced to draw a line under your mistake. But being wrong in the stock market is inevitable.  (more…)

Look at trading like a pie chart

  
  Education
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  • Risk Management:  Stop loss, profit target, Risk / Reward, and position sizing.
  • Trading Game Plan:  expectations for the next session, Levels of Interest, and intraday tape reading.
  • Psychological Health:  Staying positive and keeping your head.
Notice the three green segments in the middle of the circle (that, as I was told today by a friend of mine, looks like the Google Chrome icon).  These three segments are isolated to remind you how crucial it is to have ALL of those pieces full of their green color while you’re trading – if one of them is missing, the other two will have to compensate for its absence.  If we took the above example, we would notice that the psychological health was damaged right away, as the trader immediately went into denial about the initial failure of his position.  The trader then got pissed off, and risked more money in order to compensate for his initial loss, damaging both his trading game plan and his risk management.  The center circle is now empty for this particular trader, and he has become a loose cannon.

9 Rules For Traders

  
Analysis, Education
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1. Don’t Fight the Tape – the trend is your friend, go with Mo (Momentum that is)

2. Don’t Fight the Fed – Fed policy influences interest rates and liquidity – money moves markets.

3. Beware of the Crowd at Extremes – psychology and liquidity are linked, relative relationships revert, valuation = long-term extremes in psychology, general crowd psychology impacts the markets

4. Rely on Objective Indicators – indicators are not perfect but objectively give you consistency, use observable evidence not theoretical

5. Be Disciplined – anchor exposure to facts not gut reaction

6. Practice Risk Management – being right is very difficult…thus, making money needs risk management

7. Remain Flexible – adapt to changes in data, the environment, and the markets

8. Money Management Rules – be humble and flexible – be able to turn emotions upside down, let profits run and cut losses short, think in terms of risk including opportunity risk of missing a bull market, buy the rumor and sell the news

9. Those Who Do Not Study History Are Condemned to Repeat Its Mistakes

Cutting losses

  
  Education
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cuttingloss

There is one big difference between traders, who make money and traders who don’t. It is called risk management. Even if you blindly pick your stocks, in the long-term you will make money as long as you cut your losses short. Add to risk management a proper equity selection model and then you are in top 5% in the world. The 5% that actually make money, consistently. This is the biggest secret of successful traders – cutting losses short. It saves capital and it saves your piece of mind.

If you browse on the internet, you will find thousands of articles that preach that losses should be cut short. It is well known fact and yet you’ll be surprised how few people actually utilize it, even those who write about it. Words are free. You can say whatever you want. Many people don’t practice what they preach and this is why the biggest edge someone could have is called discipline.

There are two types of traders: the ones that cut losses short and the ones that lose everything and go out of business. If you can’t define your risk in advance and most importantly if you can’t accept it, you should not be trading at all. Reading about cutting losses short will never be enough. It is human to believe that you are different and that you know better and that it will never happen to you. You have to experience it to realize it. It is part of the learning curve. I knew about this rule long before I committed serious money to trading and yet I didn’t practice it until I had my portion of outsized losses. Today, the thought of how and where I’ll exit a trade, is the most important.

I know that there are many people who preach that they don’t use stop losses and yet they are successful. Well, if they are successful doing that, then they are not really traders. They are investors and they limit their risk by hedging, which is a whole new chapter.

Few more Seconds

  
  Education
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Many of us have made trades after a quick look at our charts and later we look back and say “I wish I would have taken a little more time before I did that”.

In the world around us, everyone is always rushing to do everything especially in making a decision. I understand that sometimes you are forced to make quick decisions, however as a trader, you will regret quick decisions more times that you will congratulate yourself.

If we have committed to our risk management, money management, trading strategy along with our overall plan for our session, then I recommend that if you truly want your sessions to be more successful, take a few more seconds in every step.

Take a few more seconds to not just look at the charts, but to truly see and understand what you see. Take a few more seconds to determine where you entry point and exit point is and not just wing it.

Take a few more seconds to prepare and instead of just looking and deciding, clearly see and understand what you see and you will enhance your trading performance.

Good risk management combines several elements

  
Analysis, Education
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1. Clarifying trading and risk management systems until they can translate to computer code.

2. Inclusion of diversification and instrument selection into the back-testing process.

3. Back-testing and stress-testing to determine trading parameter sensitivity and optimal values.

4. Clear agreement of all parties on expectation of volatility and return.

5. Maintenance of supportive relationships between investors and managers.

6. Above all, stick to the system.

7. See #6, above.

Risk Management -From ASR TEAM

  
  Education
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  • When markets aren’t trending; risk management is everything.
  • In a volatile market, capital preservation is the most important consideration.
  • Don’t be afraid to take small losses.
  • Not to hang on to my losers hoping they will come back.
  • Put in a stop right away and stick to it.
  • Set stop losses every time I trade.
  • Once again I learned that the first loss is the best loss. I let a few go too long again this year.
  • The importance of waiting for setups and limiting losses
  • Opportunities are easier to make up than losses!
  • Must have a stop on every position no matter how strong an opinion I may have!
  • Risk management. I took some losses because I made some trades based on hope and not on price action.
  • Leverage doesn’t work so well during market corrections and makes risk management difficult.
  • In my short-term trading I learned to place stops against my will and philosophy.
  • Faster exits for less risk.
  • Patience!

Thoughts About Traders and Trading

  
  Education
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* Risk Management – If you lose 10% of your trading account, you need to make 11.1% on the remaining capital to get back to even. If you lose 20% of your account, you need to make 25% on the remaining capital to return to breakeven. At a 30% loss, you have to make 37.5% to become whole; at 40% loss, you have to make 67% to return to even. Once you’ve lost half your trading capital, you need to double the remainder to replenish your account. Much of trading success is limiting losses and avoiding those fat tails of risk.
* What is a Trader? – If you ask a trader what is a good market, he will tell you that it’s a market that has good volatility; a good market is one that moves. If you ask an investor what is a good market, he will tell you that it’s a rising market. Lots of people try to succeed as traders with the mindset of investors. It doesn’t work.
* Refutation – The story goes that Samuel Johnson, upon hearing Bishop Berkeley’s theory that objects existed in mind only, kicked a rock in front of him, announcing, “Thus I refute Berkeley!” The incident came to mind when I met with a trader today who trades very actively every day, has made money on more than 80% of days this year, and has made several million dollars this year. His performance was clearly documented by his firm and the firm’s risk manager. Thus he refutes efficient market theory. 
* Success – When I see traders like the one above (quite a few at his firm are up more than a million dollars this year), it’s an inspiring reminder that success *is* possible to those who work diligently at trading as a career. The support of a superior firm doesn’t hurt, either.

Important goals for traders

  
  Education
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1) Risk management goals – Goals pertaining to trade sizing and drawdowns;

2) Idea generation goals – Goals pertaining to the process of generating sound trading ideas and formulating these into plans;

3) Execution goals – Goals pertaining to implementing trade ideas/plans so as to maximize reward and minimize risk;

4) Position management goals – Goals pertaining to the management of positions once they’re entered, including hedging and scaling in/out;

5) Portfolio management goals – Goals pertaining to achieving good diversification among ideas and allocating capital effectively to those ideas;

6) Self-management goals – Goals pertaining to maintaining a constructive mindset for optimal decision-making;

7) Personal, non-trading goals – Goals that reflect desired outcomes in areas of life outside trading that might spill over into trading performance, including physical fitness, relationships, spirituality, etc.

Stoploss for Traders

  
  Education
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There’s an old joke about the investor who never used any stop losses. His friend knew his big positions were getting crushed.

Out of concern, the friend asked, “How are you sleeping?”

“Like a baby” he answered.

“Really? You aren’t nervous or upset?”

“I sleep like a baby” he repeated.

“That’s amazing. I’d never be able to sleep through the night with those types of losses.”

“Who said anything about sleeping through the night? I said I slept like a baby: I wake up every two hours, wet myself and cry for 30 minutes before falling back to sleep.”

That’s why risk management is so critical: to save you from sleeping like a baby, and in the long run to save you a lot of money.

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There’s a reason flight attendants show you where the emergency exits are before takeoff. The same thinking should apply to investors. Prudent investors have a sell strategy in place before they get involved with a stock. Using any of these stop strategies helps keep your emotions out of the process when an investing emergency arises.

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