by Andre' Andropolis -- Some of my thoughts on trading and risk management: One thing that I've learned in trading is to not focus on the money but to focus on executing trades well. If a trader is getting in and out of trades rationally, the money will take care of itself. If we as traders focus on the money, we will sometimes impose our will upon the market in order to meet our financial needs. There is usually one outcome in this scenario -- the trader will hand over money to traders who are focused on protecting their capital / managing their risk and letting their winners run. Stay relaxed, place a trade and set a stop. If you get stopped out, you're doing your job and actively protecting your capital. Professional traders actively take small losses. There are times that traders will resort to 'hope' to save their trade. I have done this and it has cost me tens of thousands of dollars and I never want to experience this again. In life, hope is a powerful and positive thing but in executing a trade, hope is a virus that can infect and destroy a trader's capital. Refuse to damage your capital. Again, this means sticking to your stops and sometimes staying out of the market. Be very aware of your emotions when trading because irrational behavior is every trader's downfall. We are trading with other traders, not the actual stock. We have to be aware of the psychology and emotions behind trading.
Importance of position sizing: Position sizing helps protects against 'catastrophic loss.' This is the type of loss that can destroy a big portion of your trading account. This type of loss usually takes place when a trader chooses to take a much bigger position size than they should. Irrational thinking takes over, causing the trader to make a large bet by entering the trader with an oversized position. The most obvious damage from the loss is financial but the mental trauma can be more damaging. Something that goes hand in hand with position sizing is using stops. A protective stop loss is simply a pre-determined price where you decide exit a position if it should move against you. It's critical to combine reasonable position sizing with risk management by using protective stops.
Build up to a full position as the stock goes your way. Money management is the key to success. There is no logical reason to hesitate in taking a stop. Re-entry is only a commission away. Sometimes we have to look for opportunities not to trade. At times, the best way to minimize your risk is to not trade when stocks are not acting right or in a choppy, sloppy market. As Harry has said many times, 'being in cash is a position.' By staying out of the market during times like this, you are being proactive in reducing your risk and protecting your capital.
Some of my thoughts on scalp trading: In a choppy market, volatile market or when the market is trading in a narrow range, my preference is to use scalp trading. It requires that you act and react quickly in reading the movement. Scalp trading allows a trader to limit risk by having a brief exposure to the market, plus it's much easier for a stock to move 10 or 20 cents, than it is to move $1.00 or $2.00. Being able to hold positions for shorter periods of times helps avoid or reduce the chances of equity or market reversals stopping you out of your position and giving up your gains. For me, scalping also means that my risk has been reduced and that I don't need to have the proper patience that's necessary for success in other types of trading, We need to be patient with winning trades and very impatient with losing trades. If you set the appropriate trailing stop when a strong trend has developed, you'll stay in the stock and stand to multiply your profits from the trade.
As a student of life and trading, I'm always looking opportunities to learn and grow. One of the most unique statements that I've come across is the one titled "The Philosophy of Water" by Bruce Lee, martial artist and philosopher. This quote can apply to life as well as in trading. "Don't get set into one form, adapt it and build your own, and let it grow, be like water. Empty your mind, be formless, shapeless — like water. When you pour water in a cup, it becomes the cup. When you pour water in a bottle, it becomes the bottle. When you pour water in a teapot, it becomes the teapot. Water can drip and it can crash. Become like water my friend.”
My thoughts as to how this statement by Bruce Lee can be applied to trading: "As water flows, we can see that it makes adjustments and adapts to its ever changing environment. As traders, we must also make adjustments and adapt to the ever changing markets conditions that we see unfolding. Don't bet or try trading against the market trend - be like water and flow with it. Being a successful trader involves more than just choosing the right entry and exit point. Managing risk to preserve capital is also critical. We must constantly work to eliminate emotions from trading and strive to trade from a more rational, disciplined and relaxed state of mind.
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