Risk In A Trade

It’s extremely predictable.Every time I ask my trading mentor about an existing trade, how to proceed, how to adjust it, when to close it, etc., his very first question is always the same: “What’s your risk in the trade?”

It’s happened so many times, that I’m FINALLY starting to get the idea: BEFORE one places a trade, he must know the full risks involved, DURING a trade, one must always know how that risk is being played out and AFTER a trade, one way we measure its success is by the ratio of the result compared to the amount of risk taken.

Another thing that has occurred to me: the MONEY isn’t the only thing at risk! (Yes, risk is where I give FREE money to the market. When it’s a LOT of money, I hope that the recipients appreciate and enjoy it. But they’re nameless and faceless, to me, so it just looks like a big Black Hole.)

What’s also at risk is something that, at times, can hurt even more than the money (if that’s possible): my ego.

Being wrong, having egg on my face and being loud and boisterous about what’s going to happen, just before the opposite occurs are all bad enough.

The real challenge comes in when the inner voices that WERE saying, “You DID a bad thing” are now saying, “You ARE a bad trader!”

When I take the act of being wrong about my prediction of the market as personal, then it’s time for me to take a break from trading! The real RISK, here, is that I can let it sink into my subconscious mind and do some real damage.

Therefore, as a student of trading, aspiring to professional levels, I have but one recourse – don’t let my ego get involved with my predictions!

OK. Fine.

But just how does one DO that?

Step 1: Recognize that you have no control over anything that the market does or doesn’t do.

Step 2: Acknowledge that when you make a prediction, it’s OUT THERE, like placing a hand-written note on a bulletin board somewhere. It’s totally separate from YOU, personally. It’s just a projection of what LOGICAL THINKING says that the market SHOULD do.

Step 3: The market is as illogical and erratic as can be. It happens every single day that the BEST analysis, at some point or other, will be wrong.

That’s not just in trading. It’s like that in life. So, ‘What else is new?’

Bottom line: We’ve all heard the admonition, “Trade small.” It refers to placing only very small percentages of our portfolio at risk in any one trade. But it refers to our MENTAL life, as well. When you place a trade, have VERY LITTLE OF YOUR EGO INVOLVED.

The market doesn’t do what it ‘should.’ It doesn’t do what it ‘shouldn’t.’
It just does what it DOES.