Is Trading Really Risky? How To Eliminate The Risk From Your Trading

Reckless Trading

Controlled Risk

Market conditions vary: high momentum trends, high volatility market tops, low volatility consolidations, low momentum trends or ranges, and the list goes on.

As a trader you have to understand when to trade, when your trading system fits the general market conditions and when to stay out.

Professionals know when to trade. They understand their method 100% and they know the conditions that fit their style. But even more so, they understand how to model a trading system that fits their personality and character as well.

A trading method is something that has to be built around your personal strengths while making sure that your weaknesses don’t interfere with your decisions.

There is not much to say here. If you don’t use a stop, you have failed right from the start. No stop, no risk control.

Pros understand that having a stop is non-negotiable. But they also know that they have to adhere to their stop. They don’t mess with the stop once the trade is on and they take the loss when it comes. No questions asked.

Adding to losses – averaging down – is another classic  amateur mistake. Unless you have planned to add to a loss beforehand and factored that in when you did your position sizing calculations, there is no reason to add to a loss. Ever.

Instead of adding to a loss, the professionals cut losses and scale out of their position when conditions worsen. Reducing risk and limiting the potential loss when conditions don’t look too well is the fastest way to improve your performance.

Trying to catch up and get your account back to break even is a cardinal sin and it shows reckless trading in its purest form.

The profitable traders have a clear cut position sizing strategy. They don’t put too much weight on any one trade and they understand that the odds are in their favor.

Inconsistent position sizing is a capital destroyer. Giving too much or too little weight on individual trades is wrong – unless you have clear rules. Impulsive position sizing has to be avoided because it increases account volatility.

Changing the position size based on past trading results has to be avoided. Instead, position size should vary based on your historical winrate, the reward:risk ratio, the setup quality and the amount of volatility you can handle. When trading multiple strategies, a flexible position sizing approach is often necessary.

Having fixed daily, weekly or monthly goals creates unnecessary pressure. You can’t force trades. Trying to achieve a specific return leads to unforced errors and emotional trading without an edge.

You take the trades as they come. The concept of variance is important to understand and unless you have done everything correct and acted within the parameters of your trading, you will be fine. Losses are normal – learn to accept them and move on.

You don’t have a plan B if trading doesn’t work out? Even worse, the money in your trading account means too much to you and you can’t afford to lose it? Brokerage research found that such traders underperform significantly. If you “have to make it” you will fail – almost guaranteed.

You don’t create unnecessary emotional pressure for yourself. You take what the market offers and you take it one trade at a time. On the other hand, you know that one trade is meaningless over the course of your trading career.

The goal of a professional trader is it to make the best possible trades without getting the ego in the way.

To protect yourself from broker related problems or systematic risk, we recommend only putting a fraction of your trading capital into your broker. If, for example, your trading capital is $50,000 only put 20% ($10,000) to your broker but still treat it like it was the full amount. Don’t use this approach to just increase the risk!

It all starts with choosing your broker wisely. Avoid bucket shops, look for segregation of funds, the broker’s regulation, customer support, don’t fall for welcome gifts, ask for negative balance protection and check the withdrawal policy.