‘I don’t believe I am the only person who cannot predict the future prices.’’— John W. Henry (Traders Hall of Fame)
We tend to have overwhelming desire to duplicate the trading results shown to us by marketers. It’s very easy to think of what we can gain instead of thinking of what we can lose. If we have confidence that the market will move in our favor, why shouldn’t we risk about 30% of our equity per trade? But thinking that our imminent order could be a potential loss, we may play safe by risking very low.
Risk management is a protection to our nerves and accounts and sweats. If I have a risk of only 1.5% on a trade, I can walk away with rest of mind, since I know I cannot lose more than 1.5%. It’s very dangerous to think we know what we are doing. It’s this mindset that makes some traders risk more on a trade. They feel that, based on their analysis, a trade must win. Having a belief of what the markets are going to do is futile: you’ll always be disappointed. No software can predict the future, because some counts may be inaccurate.
I’ve seen a trader who made over 500% profits in 2 weeks, without even using stop loss – only to lose all of them when there were mad reversals in the markets. In the middle of last year, another acquaintance of mine made 500% in 7 weeks – using a worse expectancy system, with several similar orders per pair. His whole community was singing his praises until he lost almost all his money about 2 months later (when his system underwent some baptism of fire). The road to success is bumpy. If you lose up to 50% of your initial deposit, then you need to go for further training. But most of us will simply increase our position sizes and make aggressive entries so as to recover all the money lost (taking revenge on the markets). One may feel lucky by going against the Golden Rule and risk management, but one’s lucky days would always be numbered.
Gamblers always look for jackpots; experienced investors prefer very small, but consistent profits over a long period of time. Someone told me that there was a year when many funds managers lost, but one funds manager survived the year with 1.1% profit (Isn’t +1.1% better than -1.1%?).
With a terrible system, you can meet your objective with sound risk management. Without risk management, even a superb system may not survive in the long run. This is because the average losses are bigger than the average profits. When you think you have a good system, you need to realize that managing risks is the way to achieve your objectives with the system. You need not be a genius to make money from the markets; neither do top traders have any special secrets. They simply keep doing the same things always, aborting losses and trying to ride winners.
You need to know that top traders are sometimes wrong. You need to accept everyday losses as part of trading. While you can’t avoid losses, you can control how you react to them. Once you accept this, you have nothing to fear. If you face your fear, it cannot affect you.
I would like to conclude this article with this quote from Loren Fleckenstien:
‘Position sizing has another valuable benefit. It improves on gains during winning streaks. During winning streaks, your capital grows, which slowly leads to larger position sizes. During losing streaks, position sizes shrink with your account, leading to smaller loses.’’
Your questions and opinions are highly welcome.
Forex Signals Strategist, Funds Manager &Coach
NB: There is risk of loss in trading, but it is possible to be a successful trader.
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