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Strategies & Market Trends : Strictly Buy and Sell Set Ups -- Ignore unavailable to you. Want to Upgrade?

To: chowder who wrote (10189)	8/17/2006 2:26:17 PM
From: chowder	Respond to of 13449

A Proper Respect For Risk .............................. These days, many people are eternal optimists. They think nothing can go wrong. Although it's not very productive to think pessimistically, the power of positive thinking has limits. You cannot trade as if you have unlimited resources. You can't think, "What do I have to lose?" You can actually lose a lot. Winning traders have a proper respect for risk. They realize that they can lose, and lose big. In his interview in "Market Wizards," for example, trader Larry Hite described how he had seen friends and associates lose literally millions of dollars. Some traders, in fact, lost most of their wealth, and going from riches to rags, on a single trade. When you hear these trading disasters, you learn to respect risk. The markets are always right. As Mr. Hite put it, "If you argue with the markets, you will lose." You can't control the markets, but you can take precautions to ensure that the markets don't hurt you. No one is perfect. Information isn't perfect. Our hunches aren't perfect. It is impossible to make a perfect trade. And if it is impossible to make a perfect trade, then you must have the proper respect for risk. Mr. Hite shared two pieces of advice regarding risk in his "Market Wizards" interview: Never risk your lifestyle and always look at the downside of a trade. As simple as it sounds, few traders will follow his advice. Why can't they? People are so blinded by optimism that they have great trouble seeing risks. They want to win and they want to win big, and thus, they don't put risks in proper perspective. But winning traders are not afraid to look at a worst-case scenario. Are you? First, it's important to avoid trading money that you can't afford to lose. You do have a lot to lose. For example, if the most you can save from your day job is $1,000 a month, then it will take you 12 months to save $1,000. If you lose $10,000 on a trade, you can't trade for 10 months. Many people will trade anyway, but they are taking a big risk. They may lose even more money, and it can take even longer to save enough money to "break even." Before you take a trade, it is important to calculate the risk you are taking. For example, if a price of a stock you are planning to trade can typically drop $1 in price in a month, and you have 1000 shares, you must decide if you can afford to lose $1000. If you cannot, then you should not take the trade. Many people will view this as overly cautious, but it is not. Trading has real consequences. Learn from the mistakes of the Market Wizards of the past. Trading lore is replete with individuals who have lost small fortunes. You are not immune to losses. Don't take risk lightly. Unless you carefully consider what you can lose, you won't survive. And if you can't survive in the long term, you cannot build the skills you need to make substantial profits in market to market. If you show the proper respect for risk, however, you will survive, and realize your dream of becoming the next Market Wizard. Innerworth.com (This message is linked to previous articles.)