Ten Random Thoughts about Risk and Trading
John J. Lothian
traders often make:
1) Not having a plan for a trade. It is important to know before you get
into a trade how much you are going to risk, under what circumstances will you
take a loss and when you will take a profit.
2) Risking too much on one trade. Small retail accounts normally risk a
higher percentage on a single trade and thus have a greater risk of blowing out
and frequency of losing.
3) Letting margin considerations dictate exiting or maintaining a
position. By pushing the margin limits and having to exit positions to get out
of margin calls, traders are basing trading decisions on external factors not
related to the market.
4) Letting losses run and cutting profits short. I have seen too many
times when a trader decides to take a stand in a market and let losses mount,
and will exit winning positions because the trader needs the margin room or
emotional capacity to maintain the losing position.
5) Not trading their account like it was a market. The value of your
account fluctuates and can be plotted just like a market can. When the overall
value of an account makes a significant jump in value, sometimes the entire
account should be liquidated to capture that. This means even liquidating
those losing positions you know will come back. See number 4.
6) Not packing all the weapons of trade. It is important to understand
how to trade options, particularly as a way to manage your risk of futures
trades. Trading futures is pretty much vanilla and chocolate. Options let you
trade many more flavors.
7) Use common sense. Some say common sense is not so common. But using
common sense criteria to help manage your risk allows you to take a broader
look at a situation and the risks and rewards involved. If market volatility
is greatly increased, traders should increase their use of common sense.
8) Reassess your risk. Don't forget to reassess your risk. I recommend
traders keep a log for all trades and include in the log the reason or reasons
they put on a trade. Is the reason still relevant or have the situation and
the world changed?
9) Review your losses and your winners. Traders like to fixate on their
winners and like to forget about their losers. But, reviewing the trading logs
and looking at the losers, traders can identify and categorize their mistakes.
It is important to know whether you made a mistake or made a good trade that
just did not work this time.
10) Be disciplined. Understand when you are varying from your trading
rules and have a good reason for doing so.
Regards,
John J. Lothian
Disclosure: Futures trading involves financial risk, lots of it!
Disclosure: John J. Lothian is the President of the Electronic Trading Division
of The Price Futures Group, Inc., an Introducing Broker.