Risk Management: Safety During Uncertain Times

It's impossible to make money as a trader without taking some risks. You've got to risk money to make money. But these days it is psychologically hard to take risks. Many traders have lost a great deal of capital and are afraid to take unnecessary risks. It makes sense, but can prevent you from taking advantage of market opportunities.

Risk is a part of everyday life. We take risks even as we complete the most mundane tasks, such as when we drive our children to school. We take risks when we run along a busy street. We even take a risk taking a shower (as I found out last week when I slipped and broke a rib). It's often wise to take reasonable precautions to protect our interests. When you drive down the street, for example, it's prudent to wear seatbelts and be careful to drive at a safe speed.

When it comes to trading, it's also vital to have proper protection. Adverse forces may go against your trading plan, and unless you protect yourself, you run the risk of getting hurt, and with trading, that often means substantial hits to your account balance.

There's also a psychological advantage to protecting your interests. Taking precautions eases some of the pressure. If you know that the worst-case scenario is something you can deal with easily, you'll feel more at ease. You'll feel a sense of freedom. Acting under pressure often leads to an error, such as misinterpreting market conditions. Proper protection, gives you the time and opportunity to think more clearly, make a calm, thorough survey of all possibilities, and take appropriate action. Risk management provides not only protection from financial loss, but also gives the trader a psychological piece of mind.

When under extreme financial pressure, however, perceptions of risk can be inaccurate. Sure, the trust is hard to discern, but some traders experience analysis-paralysis. If one wants to find risk, he or she can find it. One could expect the worst and not feel like taking a risk at all. These days, perhaps the extreme volatility of the markets is putting you off. Many traders are making
profits due to the volatility, however, and if you want to profit, it will be necessary to take risk.

Risk cannot be eliminated completely, but it can be managed. If you manage risk, you'll feel more at ease, and trade with the proper mental edge. There are many ways to manage risk. But one of the best ways is to develop a very detailed trading plan in which you estimate the potential risk up front. Many trading experts also suggest making sure that the amount of risk you take is only a small percentage of your trading capital, so that should you lose on the trade, the loss will be at a minimum. Whatever approach you take to managing risk, the point is that managing risk has both financial and psychological advantages. Psychologically, you'll feel a sense of security. Deep down, you will know that should you lose on the trade, it can't hurt you very much. It's only a small part of your capital, and you know you can survive to move on to new opportunities. You will feel more relaxed. And when you feel calm, your mind will be open to all possibilities. You can gauge the market action more objectively than when under pressure. In all likelihood, your mind will move with the market, and you will be able to trade effortlessly, and reach a peak performance mental state. And when you trade with the proper mental edge, you see market opportunities and profit.