Risk !

Put bluntly speculation is a very dangerous business. Your focus as a trader should be survival. If you don’t survive you can’t win. The safety of your capital is number one priority.

In order to survive the first requirement is that you have a credible premise to speculate upon. Rumours, tips, feelings and full moons are not a premise. A premise suggests that there is an underlying truth to what you are taking action upon. Different traders may have different premises and whatever they are they need to be backed by proven logic. Secondly, in order to survive you need to think and act defensively. Instead of thinking of, anticipating and imaging how much money you can make on a trade your focus should rather be on how much money you can lose from that trade. Risk (potential loss) is the only variable you can define and control, play to your strengths and exercise that control religiously because the safety of your money depends on it.

Losses are inevitable in trading, the idea is to accept small losses (cut them short) and let profits run. Few people have the character, mental stability or the courage to take small losses.  This is swimming upstream against human nature. When a trader makes a trade decision he naturally expects to be right. When the market shows him otherwise, his ego steps in to help him defend his decision and it brings with it all sorts of reasons and emotions. The fact that his money is on the line and he is losing it makes the situation worse because he has an emotional attachment to that money and we all know letting go is not easy. He stubbornly holds on to the trade decision until he realizes he is at the mercy of market and the worst (blowing up his account) is about to happen. This is about the time he turns to hoping and praying and repenting not having cut his losses. Unfortunately, for most traders it takes the pain of an emotionally wrecking loss for them to realize the importance of cutting their losses – yes, I have been there and I paid a very expensive tuition.

Warren Buffet put it right when he said “The market like the Lord helps those who help themselves, but unlike the Lord it does not forgive those who know not what they are doing.”

Be abundantly blessed!

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: