Risk in Day Trading

Don’t worry we are all uncomfortable with risk, its part of the human condition.
However, simply by improving your trading you are decreasing your risk and
that is in YOUR CONTROL.

Whilst risk may seem to be beyond our control actually
much of it is within our control and this is what this article is about.

  1. Learn the basics.
    Honestly, trading is risky, if you don’t know what you are doing.
    Figure out one set up before you start dabbling with another. Practice until
    you can execute it in the same way you can drive your car. Then, move onto the
    next set up. Establishing this knowledge base first then you will become more
    comfortable with the perceived risk you are taking. Improving your knowledge
    of the rules of the index, observing past trends, and applying this information
    as you trade, will make it far easier to take calculated risks.
  1. Do your homework.
    OK, this follows on from the last point but it is important.
    Doing your homework as a trader means you must be prepared.
    Review your trade plan. Review if something is setting up or not. Don’t
    force yourself into a trade just so you can be in a trade. Take your time, more
    trades will come.
  1. Surround yourself with success.
    Successful traders by definition have managed success by becoming comfortable
    with a level of risk. You don’t start out trading £100 a point. Even if your bank
    account can manage it, your nerves can’t! So you have to become comfortable
    with it. Surrounding yourself with those that have mastered a steady hand at £100
    a point can help give you the confidence (especially if they are following a
    similar strategy) to trade at £20 a point.
  1. Consult with your mentor or an advanced trader.
    This just means finds someone who is further along the path than you.
    This means that they can give you many nuggets of information that you
    would otherwise take years or maybe never uncover. Now when it comes
    to risk your mentor has no doubt had to tackle the issue a few times
    whilst increasing his position size. Listen carefully to how he or she tackled
    these issues and eventually overcame them.
  1. Anticipate potential results.
    Consider the potential upside and downside before you pull the trigger.
    Recalculate your position size to avoid mistakes. Think what is the best or worst
    thing that could happen. Once you know, that it can make you more
    comfortable with the risk you are taking. If it’s not making you feel any better then
    you are either taking a risky trade or you are taking a position that is beyond your
    current risky profile and you need to scale back a little whilst you figure out what is
    going on. Refer to the previous point on where to get some help, if this is the case!
  1. Know that you will make mistakes. Sometimes they happen. This is not risk
    but is a culmination of all the other tips. Be prepared and it will reduce
    mistakes. Knowing your position size. Knowing probable results will all result in
    reducing your mistakes. At the same time, they do happen.
    Be prepared for these and accept them as part of your learning.

How comfortable are you with risk?

OK, how about a quick fire round on specifics on how to eliminate risk from your trading in practice.

  1. Know your edge – Professionals know their edge. They know when to trade.
    They only trade when it is their time and conditions suit, they do not spend all day
    at the screen “trading” aka betting.
  2. Develop a trading style that uses your strengths whilst at the same time eliminates your weaknesses.
  3. Respect the STOP.
  4. Cut your losses don’t hang on hoping for green.
  5. You have a method to calculate position. The only time it can possibly change is if you
    are running more than one system, with different trading position sizes. Otherwise, it is the
    same each time not depending on how likely you think the trade will come in.
  6. You understand variance. Variance is; sometimes trades lose and sometimes they win.
    Sometimes they lose more than other times. This is variance, it is not risk. When you understand
    this you can take losses more easily and with it the perceived risk.
  7. Take one trade at a time. You know that today it could lose or win but tomorrow the outcome
    will be different. Therefore, you focus on the task at hand and know that tomorrow this trade will
    be meaningless, in your whole trading career.

So that is risk, what are you going to do now to build your risk muscle?

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