Risks comes from not knowing what you are doing
Quote from Warren Buffet
Sometimes, when I have talks sharing on trading, I would ask my participants whether they feel trading is risky. And most of them would say yes. Well, the reason why they feel that it is risky is because they do not know what they are doing when it comes to trading. It is the same with most areas of our lives as well.
Ask a established driver whether driving is risky, he will tell you that it is not risky because he knows what he is doing and he has been driving everyday for years with a record of zero accident. Others who have never driven before and do not know how to drive will feel driving is risky because they do not know what to do even if you put them behind the wheels. Ask a professional mountain climber whether mountain climbing is risky, and he would tell you that when it comes to mountain climbing it’s not risky because he knows what he is doing. Everything we humans do in life has risk but if we know what we are doing then it is not risky. This is especially true for trading. Trading will be risky if you do not know what you are doing. It will be safe if you know what you are doing.
Knowing what you are doing also means to be able to know all the possible scenarios that will happen in the future and be prepared and be able to handle it when any scenarios happens. A established driver would know how to react if the car in front of him makes an emergency brake because he has prepared and was mentally ready for it way before the incident happen. He would know how to react even if one of his tyres suddenly punctured on the road while he is driving. He was prepared and knows what he should do to react. He basically knows what he is doing when it comes to driving.
For trading, most people feels it’s risky because they do not even try to look at what they are getting into when they go into a trade. They always intend to go into a trade wanting to win that trade with lots of profits. That’s it. And they go into the trade after that without mapping out the possible scenarios that can happen. So when the trade goes against them and start to go into losses, they start to panic because they did not expect such scenario to happen and do not know what to do next. This few questions start to run through their mind. Should I buy more to average down? If I average down then at what price level should I average down? Or should I get out and cut my losses? If I want to get out and cut my losses then what is the price level to get out? Should I just hold on to the losses as it may rebound? How much losses am I able to take while I hold? What is the maximum losses I can take? Should I hold the trade till it reached the maximum losses I can take? All this should have been asked before putting a single cent at risk. Before even trading the security, all this should have been answered. A proper trading plan would have address this. All possible future scenarios that may happen and how to react to them should be in your trading plan. Below are some of the important items you need to have in your trading plan.
Before going into a trade, pre-determine beforehand,
(A) How much are you willing to lose in this trade such that if you lose that amount(in dollar terms), you will be totally fine with it?
(B) At what point should you cut loss? (This is the point or price level where you say to yourself that your analysis is wrong and you are willing to take limited losses to get out of the trade)
(C) What is the price level or entry point to go into the trade?
(D) How much shares or units should you commit into buying/selling to open this trade? (Once you have pre-determine A, B & C, you will have able to calculate D by using the difference between B & C and dividing the result by A)
(E) If the trade goes in your favor, at what price level are you going to get out with the profits?
Now ask yourself this, would you feel much safer if you do the above, have a trading plan before trading and would know beforehand how much you are going to lose if you lose. Know beforehand how much you are going to make if you win the trade. Would you be closer to knowing what you are doing in terms of trading? Would you feel trading is much safer if you did your plan? Most of my participants after my sharing with them walk out of my sharing session saying they feel much safer trading the markets from then on. It is important to to have a plan to map out all possible scenarios and also in that plan, how to deal with all the possible scenarios. Be prepared before it happens whether for good scenarios when you win or for bad scenarios when you lose. Once you are able to map it out in your trading plan and follow it. Trading will not be risky because you will know what you are doing and is prepared for all the possible scenarios that will happen and is ready to react if they do.
You know what most people out there do? Most people out there do not have a plan. They do not have a life plan let alone a trading plan. That is why most people who trade the markets lose money to the markets. I am not saying that if you have a trading plan you will succeed. But instead, I am saying if you have a correct trading plan and follow it through, you increase your chances of succeeding in trading by a lot. People ask me what if I don’t do that plan. Well, you just increased your chances of failure pertaining to trading. That’s all. I will leave you with a quote I like and benefited a lot in my life and in trading as well which I feel applies to life and particularly to trading as well. I hope you will benefit from it like I do. You may have heard it before but didn’t react to it much back then. I hope it does now after reading my sharing here.
If you fail to plan, you are planning to fail.
Quote from Benjamin Franklin
Cheers and enjoy, Wishing you consistent income from trading.