Trading Room – Fri 2 Nov 2018
Most common traders do not succeed because they fear risk and this normally due to the reason that they are not confident in their own trading ability.
It’s a vicious cycle.
Excessive fear of the risk keeps a trader from exploiting rewarding opportunities when they come.
Although some traders may be successful from the start, the early market experiences of elite traders are normally marked by complete failure. Experience actually builds confidence in the elite trader by giving him/her a form of trading edge but unfortunately, it created a fear syndrome for the majority of common traders in the market.
Fear of the unknown is normal in human nature but to be successful in trading, one has to be confident to take the risk in order to succeed.
In fact, to be a winner in good trades, you have to be willing to take a loss in the occasional bad trades.
You can’t be afraid to take a loss as the people who are successful in the business of trading are the people who are willing to lose money.
Making a loss in one or two trades is the sacrifice to make very rewarding trades in eight or nine others.
We can never eliminate risk in trading but we can easily control it to build confidence to enter the trade.
One of the common mistakes made by common traders is that “they spend too much time trying to discover great entry strategies and not enough time on money management.”
Containing losses is actually 90% percent of the battle for elite traders, regardless of the strategy.
Always try to make your losses as small as they can.
There are several ways employed by elite traders to contain risk:
Limiting the initial position size.
A common mistake a novice trader tends to make is that they take on too big of a position relative to their portfolio.
Hence, when the stock moves against them, the pain becomes too great to handle, and they end up panicking or freezing.
Never make a bet you can’t afford to lose.
Elite traders always predetermine where they will get out of a trade that goes against them.
This approach allows them to limit the potential loss on any position to a well-defined risk level.
Our own mPower Algorithm and mPower Trading programs use dynamic (moving with the market) algorithm-calculated stop loss position at all levels to minimise risks and allow us to exit at optimum profit levels.
We always know when to exit at the optimum level when the market moves against us and its never a big deal as it’s all part of the predetermined trading plan for the stock beforehand.
Selecting only low-risk positions.
Some traders may rely on very restrictive stock selection conditions to control risk as an alternative to stop-loss liquidation or position reduction.
This method is perfectly valid for common traders to build up their win rates and confidence in the beginning.
However, for us, the Master Algorithm, which powers our mPower Algorithm and mPower Trading programs, actually covers the whole breadth and depth of the market and hence, this gives us the option to choose high-risk and low-risk positions depending on the state the market is in.
Hence, we excel in high-reward high-risk trades where the gains are above average or supernormal as we are able to scan the entire market for the best opportunities as the Master Algorithm processes millions of stock positions and data daily.
This is an important principle for elite and professional fund managers as the more diversified the holdings, the lower is the risk.
However, the best of the best elite traders knows that diversification by itself is not a sufficient risk-control measure because of the significant correlation of most stocks to the broader market and hence to one another.
The Master Algorithm that we use for the mPower Algorithm and mPower Trading programs actually create an optimum portfolio for us in this sense as it algorithmically (mathematically) calculates the entire various sectors outlook of the market for us in multiple time frames hence allowing us to create a very diversified yet uncorrelated model portfolio at all times in moving with the market.
This is important as too much diversification can also have significant drawbacks and dilute the above average/supernormal returns that we strive to make. Hence, one should always strive for optimum diversification, not simply pure diversification.
Although the common perception is that short selling (where regulations permit) is risky, it can actually be an effective tool for reducing portfolio risk.
Hedged strategies can also be used to limit risk in the entire portfolio.
Risk control hence should not be confused with fear of risk.
A willingness to accept risk is an essential personality trait for an individual trader and it goes for portfolio model management as well for professional fund managers.
You always have to be willing to accept a certain level of risk, or else you will never pull the trigger.
The confidence to take risks in trading eventually boils down to your own confidence in your trading knowledge, system and skills.