As professional traders, one of our main jobs is going to involve managing risk. I say managing, and not eliminating, because risk can never be removed. Risk can only be managed and mitigated. Even then, you will never get to the point where you have mitigated every possible risk. The unknown unknown, those things that we cannot predict but know very well will happen, will always have the potential of raining ruin down upon us and our trading accounts.
But the known? Many traders operate in blissful ignorance of risks that can and should be managed in order to safeguard our trading operation. By now, readers and followers will be aware that we believe that trading can only be successful if you treat it as a business, and moreover, treat it seriously. Just as you would not operate a brick and mortar business without having the right level of insurance coverage, you should not operate your trading without covering as much of the risk as possible.
Some risks are simple and easily managed, for example, always trading with a stop loss so you have a limit on your possible loss from any one trade. Yet how many traders do we hear from every day who lament not having placed a stop loss only to find that their trade has gone deep into the red as a result. And what do they do then? They stay in the losing trade because they cannot afford to lose that much on a single trade, and they hold out hope that it will reverse and at least allow them to get out at break even. I’m sorry, if you are deep in the red already, you have lost that money. But even worse, you are now placing yourself in the position of losing even more if the trade continues to move against you.
If you were running a shop and an employee had already stolen $100,000 would you wait in the hope that maybe next week he will return some or all of the embezzled funds? I don’t think so.
And, of course, some risks cannot be predicted or protected against. Something like the 9/11 Attacks against the United States had never happened before, and there was no advance warning to let the market know that it was coming. Yes, the FBI and the CIA may have had enough intel to have pieced it out before the event, and they didn’t, but the market did not have access to this. When the planes hit, they not only sent shock waves through the buildings impacted, they also sent shock waves through the Market. Immediately, shares for the Airlines involved dropped precipitously. Once it was clear that it was an attack and not an accident, the Forex Market shook, with USD pairs being the most strongly affected. It was, at the time, the Black Swan to end all Black Swans.
Can you protect yourself 100% from something like that? Not altogether, no. But you can protect yourself from 95% of the effects of something like that, even if you don’t know the nature of the Black Swan or when it’s coming. It takes knowledge and planning, but it can be done. Watch our bonus session (the video at the top of this page) covering the concept of Risk in Trading. It may save you one day. And if it does, we couldn’t be prouder or happier.
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Andres Pedraza
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[…] of their results. You have no idea how they are managing the trades, which normally leads to mis-equity management on your part. Leading […]