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Trading Safely
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It is a fact that a great majority of traders feel that knowing all the
moves in advance, or having some indicators that cross over each other
giving buy and sell signals is all that is necessary to succeed in this
market. Nothing could be further from reality.
True, it is important to have a good system or tool. Also, having the
right mental attitude cannot be overlooked. But another facet of trading
that many new ones must come to understand is to preserve trading
capital.
It has been said that to not trade may be one of the most important
action you can take to be successful in trading. I believe this to
reveal some very important points. A successful trader needs to know not
only when to get in, but when not to. The trader must make the decision
prior to putting on a trade as to what the maximum risk is going to be.
If the risk is too great for the size of your account, you should let it
pass by.
There are many suggestions as to what percentage of risk one should
never exceed. I prefer 5% as a maximum, which for any decent trader
should weather a storm of losses just fine. If you start to increase
this amount, you are lowering the number of hits you can take.
Now, a small account risking only 5% in itself may be risky, because it
may mean the stops will be too tight and cause many premature exits.
Once an account gets to the point where 5% is less than $200, it is time
to look into options (another form of risk) or build your account up
prior to making another trade.
Now in the way of technique, one such technique works well for those who
trade based on time. If you have time, and expect a turn, the low risk
thing to do is not to try to trade the presumed bottom of a downward
trend, or the presumed top of an uptrend. Time trading is not a perfect
art. The best available can be a day off. So, you will want to make sure
that what you thought was a time day bottom, isn't really a one day off
time day high! If the trend is moving down, you'd only be looking for
highs, now wouldn't you?
This is just one technique to protect yourself when time trading. If you
do moving average breakouts or pattern breakout trading, this is a
different story altogether. Here, you will then use the breakout
indicator, whether the moving average line or the breakout price level
as your shield, and place your exit order on the other side of it.
Practice safe trading. Keep your risks managable, never overtrade, and
only enter when it appears safe to do so.
This is not an exhaustive post on how to do this, but a brief offering.
Cheers!
:)
rick
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