It is significant to hedge your portfolio irrespective of whether you invest, trade or speculate. The gray market players can still look toward serious risk-taking (because one huge profit can wipe out a series of losses), but when it comes to institutional or exchange-bound traders, the margin for error drastically reduces. For markets where you hardly break even at a 70% accuracy rate, risk management becomes quite an integral part of "money entrepreneurship".
Amateurs make many mistakes while placing a trade, but the one that tops the list is their oversight toward risk management. This brings us to a crux- how is risk read? You need to weigh the prospect of rewards in a venture against the probability of losses associated with it. When the latter is greater than the former, a trading proposition is believed to be risky. You can still go forward with it if you know your way through the road and cut down all the risks that come along.
It is well known now that Housing Fiasco or SubPrime Crisis snowballed into a global concern because it wasn't hedged against borrower defaults. It was like placing a trade where you did not know the points of "Stop Losses" or exit routes. If an analogy had to be drawn, SubPrime crisis undermined the importance of "Technical Analysis" and went ahead without giving due importance to statistics. On a macro-level, such ventures are bound to fail, and this is exactly what happened in 2007.
If you extrapolate the inferences and look over the micro level, you would find risk management to be an integral part of trading. It has many components, and each deserves incorporation into your trading manual (trading psyche if you like it). As a first, you should not look to over-trading. Over-traded funds are often poorly leveraged and result in either a "poor end to a great start" or a "dubious end to a poor start".
Overtrading also means payout of higher commissions. Unfortunately, the commission remains a constant whether you gain or lose out of a trade and thus, it encroaches on your profit tally, when watched over a broad trading spectrum. People often overtrade because of a cliche notion- more moves, more profits. They fear missing on a single move and assume that particular one to be a windfall move. They could not be farther from the truth!
Players trade more when margins drop. This is another aspect that goes completely against risk management principles. Margin is of little importance when it comes to actual money management because margins are always leveraged in favor of a player if he hedges his trade and plays constant numbers. (Of course, his trading on the whole can go wrong, and this may inflict losses on him).
For active risk management, you should play for a budgeted number of hours and turn off your platform or bot irrespective of your position on that given day. It is also important not to play on the next day of a big setback. This is largely because the psyche craves to get back the whole amount (lost on the last trading day), and this may lead to chancy trades and further losses. It is also advisable to trade only during certain time zones.
As an aside, you should pay due importance to simulated sessions where you do not play with live money. Smart trading begins with a smart psychological response to the game. You must remember that you are bound to go wrong at times, and thus, it is all the more important to make the most of good trades.
Have you ever wondered how professional traders navigate Stock, Futures, Options and Forex markets? TradingPub provides Free online trading education as professional traders share from their experience, tools and techniques. If you would like to expand your option trading education be sure to join us for one of our free online events.
No comments:
Post a Comment