Every now and then we need to step back and think about how we approach trading. Oh, I'm sure most of you are well-prepared, have good trading systems/strategies and do manage to take home green more than red. However, we need to review our tactics at times in order to refine them a bit in a constantly changing environment or just to reinforce what we are doing right.
Trading and investing are not anything tricky; they do not require black magic. But because nobody can see future outcomes it does require some checks and balances so we don't blow ourselves up. In my years in the markets I have seen that happen needlessly all too often.
Someone will come at me with a bullet-proof system claiming they have the keys to the kingdom and cannot lose. A week, month or a year later, they are busted. It just happens.
The market is not there to make you rich; it is there to teach you lessons. These lessons are about risk management, control, discipline and humility. If you can crack all four, you're going to be in the game for a long time.
And that's what this is about, right? As traders, we are without the security blanket of a position or job. Each day we are at risk of being "fired," so to speak. So, we all need to learn the rules of the road and practice them, or else risk running off the road and into a ditch.
Let's start with risk management. Only use discretionary capital, what you can afford to lose. Not many out there have this to spare, so that makes the choice to trade or invest much harder. If you can do it establish a sound risk strategy and don't violate it -- or try your best not to. I realize our eyes get wide when opportunities are in front of us.
We want to press the bet, shoot the ball when the hoop looks to be very wide. This is often when disaster strikes.
Take it from me: Trying to recover from a disaster is a painfully long experience. Play it smaller, manage your trades effective, take profits and live to fight another day.
I recommend a set percentage of account to trade. With options trading, a modest 2% to 3% of the account is plenty to work with for leveraged vehicles. For stocks, up to 10% of the account is sufficient; also, keep strong levels of cash and always some protection by using index puts