Saturday, December 06, 2014

A salutary lesson about risk

Here's an extract from an email from a trader about a recent losing trade. This is a great example of why risk control is paramount in your overall trading approach:

"But now to what I have called my 'Greego' (Greed / Ego) trade in gold. I took a short position in gold but as it's minimum 10 contracts the risk was slightly too big (I knew this but did it anyway). The trade immediately went my way (wow I'm a hero...) so I shorted again (the risk was much too high, knew it and did it anyway. i.d.i.o.t).

End result was waking up in the middle of the night for a number of nights to check the gold price and a 3R loss! It hurt for a few days but I actually feel fortunate to have experienced this with relatively small amounts of $. Just DUMB trading, you know you should just get the hell out of the position but you don't. THAT'S the emotions they talk about in the trading books.

I heard recently the 3 ways to learn to trade are 1) Read 2) Learn from a Mentor or 3) Piss on an electric fence. I pissed on the electric fence with gold."

As I said to him, 3R is a relatively cheap tuition fee for taking on that level of risk, PROVIDING he learns from it.

This little episode encapsulates the thought processes of a trader who won't last long in this game. The markets seemingly know when to punish a trader. Fortunately, he got out relatively unscathed. Going forward, he should learn more from this one trade than hundreds of profitable ones. If he doesn't, then he won't be around long enough to profit from any future trends. That's the brutal truth.

1 comment:

  1. exactly the same sentiment to scared to take a loss & letting the trade fester until you are forced to take a bigger loss