Trading:The ART of Risk Management

By | July 26, 2021 3:53 pm

Trading  is all about playing against the mind of the masses. The big guys and Fund Houses successfully will beat your mind by making you think, think and think. Is the right time to get in, will the market fall, and so many times people have asked me when the BIG correction is going to come?

Many people have gone short in this Bull Run and felt the heat. ‘Go short’ that is what your mind will tell you when the NIFTY makes 3-4% over 8-10 days.

There are many traders who suffer from this mental gridlock. Chances are that you are one of them. Human beings excel at pattern recognition but when coupled with risking money, they fail miserably. Fear or greed gets in their way of thinking. It is your ability to recognize charts, without needing conviction from another trader or CNBC that will separate you from the rest.

Predicting is a curse that is thrust on a trader, because normal thinking tells you that to make money you have to be able to predict a movement in a certain direction.

This is where you take out the emotion and thinking from trading. Use the best charting software and setup  that should tell you when to long, short or be out of the markets. It doesnt matter if you following a trend trading system or a breakout system. You will be probably fit into one of these categories of a trend trader or a breakout trader. It is for you to choose. The master can be both. Once the decision-making is handled by emotionless software, which work tirelessly for you, most of your time you can spend on money and risk management. Stop thinking about whether the buy/sell signal is valid or not. Just make sure that the difference between entry point and the stop loss is acceptable by your risk management system. Focus most of your on capital management. Things will become easier for you. Stick with your system and dont keep changing it. Do as many as a test you would like before applying it to your trading style.

You will still not be successful if you dont develop a good profit taking mechanism. You or your system be may be very good at generating 80-95% perfect buy or sell signals, but unless a good stop loss and profit taking strategy is not is place you will be out of the game maybe not soon enough but later. A sloppy stop loss is all that is needed to make things go against you accumulation. On the other hand your impatience will not let your ride the full Monty. There is no way to tell if this is a top or a bottom if you have made it on the right side of the trend. The best way is to change the stop loss of your first lot above your or below your entry point using time as a parameter. The rest you can exit when your decision system tell you to. The more time you allow your trade to flow more are the chances that it makes you a good bundle.

You will perfect your system by surviving in the market. Taking a small hit today is the best strategy. Learn and device your risk and money management techniques and leave alone making entry decisions, because there is no perfect signaling system and there will not be one. There are plenty of tools available out there that can do better than you. Making money in our markets or for that in any conventional market is the art of capital and risk management.

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