Tuesday, June 7, 2011

Define your Risk

The single most important skill to develop as a trader is the ability to cut losses. The one trading trap that will cripple any trader is the refusal to know and admit that any given trade is simply not working.

The only reason a losing trade happens is because at that precise moment you are on the wrong side of the Market. It really doesn’t matter how that happened, the fact is you are losing money. As long as you continue to remain on the wrong side of the market, your loss will continue to grow.If you do not liquidate the trade (take the loss), it would mean that you have lost control of your trading.
 
To ensure that you remain in control of your trading, define your risk. Define your risk starts with a stop loss for all your trades, but it is much more than that. One question you should ask when defining your risk is “How much do I really know about the F&O market?” If your honest answer is “Nothing, really,” then it would be a very good idea to commit to learning a basic understanding of what traders in that particular market focus on and what tends to cause a reaction in prices.
 
To tarde a market without adequate knowledge is also a high risk activity. Knowledge comes from learning, education, practice. Your actual education process as part of your risk-reducing strategy. Can you honestly say that you are an expert on the market you trade? If not, then learning is an important step in risk reduction.

3 comments:

raman said...

Well written:: "Define ur RISK!"
One must know, RISK & REWARD before creating any position.

I do prefer NIFTY FUTURES but after a set of DONATIONS in series. Now, i m more comfortable with NIFTY OPTIONS bcz of short-term risk reward ratio!

Say if one is bullish @ 5500.
So, Shortterm-POSITIONAL buying @ 5500 with S-L @ 5400. If S-L hits then loss of 50 * 100 points = 5000
But if buyer decides to buy ATM 5500 CE @ 100/- then the risk reward ratio favours LESS RISK & MORE RETURN! If nifty gets back to 5400 then 5500CE will reduce to near HALF I.E 50/- (50*50=2500)

But if short term target hits @ 5600 then REWARD IS SAME! 1LOT

fUTURE reWARD= near 20% = 5K
OPTION REWARD= Nr 100% @ 200/ =5K

================================

I can remember last wednesday WHEN WE WERE BEARISH @ NIFTY.

S-L FOR DINESH (mY FRIEND) TRADE TRIGGERED @ 5590.

But My S-L for OPTION POSITION was far away.... (a wave)Thursday was gud but (b wave = 101% a wave retracement)friday morning was bad as it was not possible to maintain position above 5600........But atlast covered @ monday around 5492 levels.....

Conclusion::::
For short term traders, options seems gud bet rather than futures where maximum amt to loose = premium only. Writing calls & puts can be more beneficial but RISK UNKNOWN! Only thing to take care is TIME FRAME OF PREDICTION i.e. OPTIONS CAN LOOSE PREMIUM WITH TIME. So, earn safe... AS TREND IS FRIEND! FACT: NOBODY IS AN EXPERT!

What's up in ur mind???
What's the best bet??
FUTURE OR OPTIONS?
COUNT PROS & CONS....

rajamani said...

Learning and experience comes at the cost of the money one loses

STOCKSJYOTISH said...

there are some field where you must learn from other mistake and not from yours .....STOCK MARKET IS ONE OF THEM....I always tell to my friend by example.

If there is 30 students in the class its not possible that all 30 will come first but if rest 27 follow the first 3 genius at leaset they will never fail. Its difficult but try to practice its a magic.