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

MASTERING RISK DURING A TRADE

Here's how it usually goes: Once you detect your setup at the price that gives you your plan-prescribed edge, you enter the trade in accordance with your trading plan guidelines. Then you wait for the market to do its thing and produce its edge-based results (preferably at the historical win rate or even a bit more if the market is in a giving mood). It sounds simple to wait it out. We often wait at red lights, train platforms, and at the dentist. So why do some traders have so much difficulty doing it during a trade? I find traders have the most difficulty simply doing nothing. Sitting and patiently waiting for a trade to pay out is often the most difficult thing for some traders. The flashing platform lights and price movements create an arcade-like atmosphere that engulfs the trader in wanting to do something when simply doing nothing is the only decision that is warranted.

Why do traders do this? Why do we close a position before target? Or before our proper stop? The answers can be quite numerous, and sometimes the reasons are valid. Perhaps the trade is still open, and a news event that will rattle the markets is ready to come off the wires. Maybe the trade has not reached target or stop, and your rules require you to close or at least reduce the position before the close. These can be valid reasons supported by your trading plan. They are predetermined decisions that if not adhered to will result in noncompliance with your strategy.

Rarely will ...