The Risk of Trading: Mastering the Most Important Element in Financial Speculation

STEP FOUR: MEASURING RISK

While sitting down with a fellow trader, I asked him how he was progressing in his trading. He had been receptive to including risk-based trading into his everyday trading the previous year, and so in our follow-up meeting we began to discuss his journey. I asked for his monthly summary assessments and trade journal. This was his response: “I just stopped tracking things. My trades were doing fairly well and I just focused on the setups. I figured I was making money, so I got a bit careless. I also got a bit overconfident and started raising contract size based on feeling and started trading forex and other futures contracts such as grains and gold. One year ago I was so confident in what I was doing, but now I feel every day is like going to a casino. I'm still optimistic that things will turn around, but I have to get more consistent and back to basics. I know my setups work. I know it.”

I was disappointed but not surprised. A lot of traders that break away from a supervised or mentored environment often will temporarily fall back to their unstructured ways of trading. Confidence and early positive results can have many negative effects on a trader. Some sleep in a bit longer and do not put in the premarket work needed. Others stop tracking their trades in thinking that the setup works and will always work in all markets under all conditions. Trading is no different from any other business. Those that commit themselves to dedication and excellence have ...