Trading by Numbers: Scoring Strategies for Every Market

CHAPTER 4

Protecting Your Position

The heart never takes the place of the head: but it can, and should, obey it.

—C. S. Lewis, The Abolition of Man

There is probably no more important topic in trading and investing than risk management. That's a pretty bold statement, considering how many different markets, strategies, products, and analyses you have available to you. However, the fact remains that the best strategy executed under seemingly ideal conditions may sometimes fail to play out per your expectations. When that happens, you must have a plan to defend against losses. The natural inclination is often to justify why you should be right or reason that if you hold the position a little longer, it may come back into alignment with you. At the moment you start to second-guess your risk management, you become an emotional decision maker. To paraphrase C. S. Lewis, the famous author of the Chronicles of Narnia series, your heart must yield to your head. You may not feel like taking a loss, but you must have a strict risk management discipline that cannot be compromised for even a single trade. We often point out that it only takes one catastrophic loss to wipe out years of accumulated earnings.

Since we're talking about making your emotions subservient to your intellect, let's start by making an appeal to your emotions. You'll find out soon enough that helping traders manage risk is one of the passions that drives us. We're often asked why we continue to write and speak about ...