Lessons from the Pros

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Risk Management Graduate

Risk management: one of the areas of trading that every trader must master before they can expect to become successful.  Risk management, just like trading, takes time to become proficient.  While instructing Futures classes at Online Trading Academy we always stress that learning to trade takes time and you will not be an overnight success.  It will take time, practice, continuing education, self understanding and passion.

When I started trading Commodities it took me 4-5 years before I felt like I was getting comfortable enough to feel I could trade well.  Of course we did not have the luxury of attending online classes, internet research, social networks to share trading ideas or mentors willing to share their trading success stories.  Today learning to trade well might only take 12 -18 months.  Some of you might think this is too long, but be prepared for a journey and not an overnight success.

Trading is more than learning a system.  Anybody can learn how to buy here and sell there, but only a professional will know how to manage their risk so that trading will become a long-term possibility.  Part of the learning experience is understanding how each of us will react to certain situations in the market.  You can read books or listen to lectures, but until you actually experience each of these situations you will never know exactly how you will react. Let’s review these three market environments that a trader must experience firsthand:

Losses –  Money means different things to different people.  In the end none of us like to lose money.  Money isn’t easy to come by and most of us surely don’t want to see it disappear.  Trading has no guarantees that you will get paid.  Even worse is the fact that you can put in a lot of effort and still not get paid, this is called a trading loss.  Unfortunately, until each of us experiences a trading day or week that we lose a large sum of money we will never know what our personality traits will cause us to do in this situation.

Some traders will turn into revenge traders, vowing to get even with the market.  They will begin making very careless and reckless trades trying to win back their money.  Meanwhile their accounts are dwindling even more because they are not following their trading plan and eventually they lose everything in the account.

Other traders will understand that something went terribly wrong and that they need to stop trading and evaluate the situation before placing anymore capital at risk.  These are the traders who understand risk management.

Once a trader experiences this loss he/she will know exactly how they will react the next time, and will be better prepared to handle the experience.

Profits – Who would ever think a profit was a bad thing?  Normally it would not be, but if the profit came in the form of a windfall and you do not know how to handle yourself emotionally with this extra capital it can cause problems.  And if you broke your trading rules and still got this windfall you are really in trouble.  When a trader breaks their rules and is rewarded with a win they start thinking that breaking rules is fine.  There is a saying in the markets, “You can break the rules once in awhile, but eventually the rules break you for not respecting them.”

Too much money in a trader’s account leads to taking careless, unplanned trades.  This leads to losing money, and when the trader begins to panic because they are now losing they start losing more with bad trades. This is referred to as trading for the money and not trading the markets.

Traders who understand risk management will take monthly draws on their trading accounts to bring the account to an initial capital base that allows them to trade the following month.  By keeping a minimum amount in their accounts the trader is forced to be more selective in their trade choices and be patient while the trade sets up.  The capital that is drawn from the accounts is first used to pay the trader and the remainder is put into a wealth building account.  Most traders leave their profits in their trading accounts and then give it all back later with the attitude that the profits were house money.

Boredom Days – These days ruin more traders’ accounts than any other. Most of us were raised to work hard all day for our salary.  As a trader you will spend endless hours with no trades because the market is not conducive to your trading plan that day.  Most novice traders don’t have the patience for this and begin to make up trades instead of following their trading plans.  Once a trader begins to lose money with these bad trades they begin to overtrade and over-leverage themselves with contracts and turn a small loss into a very large loss by the end of the day.

These are the types of days that a trader must experience and find out what type of person they become when the day occurs.  Unfortunately these types of days take time to experience and that is why I think a trader needs approximately 12 -18 months of experience before they can expect to trade well.

Recently I received an email from a wonderful student from my Singapore Futures class.  I would like to share it with you and then some of my email I replied back to him.


“I have not been able to achieve any consistency.  I have been trading for about a year and my trading results have been hovering between breakeven to down 5-10%.  I have a stop loss and a profit target with every trade I enter.  However, when price hits my stop I would always feel extremely frustrated and find it very hard to continue trading on that day even though it is only a small loss.  Furthermore, I would also feel very angry with myself if I missed a good trade.  I feel this is my biggest obstacle to consistency and I am feeling a little lost on how to resolve this.”

For the student I could see his frustration, but I was so impressed with his risk management skills. This gentleman showed me he has the risk management side of trading under control.  Below is my email I wrote back to him.

“First off congratulations on your trading success.  That’s right, I said success.  You may have forgotten, but in class I mentioned that after the first year of trading if a trader can be around breakeven they have an excellent chance of becoming successful.  Remember, overnight success is extremely unlikely. It will take even more effort on your part to continue this success.

By being around breakeven after the first year this shows that the trader has excellent risk management skills.  During this first year you have now had a chance to see how you personally will now react to certain events in the market (losers or winners).  Many traders turn into revenge traders when they have a loss and eventually end up blowing up their trading accounts.  You simply walked away and knew something was wrong and did not continue trading when it was not working.

I do not know if you have a written trading plan, I hope so.  If you do it is now time to start re-evaluating to eliminate some of the problems and find ways to increase your trading edge.  This may involve learning more about how to select levels to trade at, where are they on the curve, changing where you are placing your stops, etc.  Plus, are you trading the same market all the time?  If so, try another market and see if it works better for you.

Don’t give up and don’t be so hard on yourself.  Everything you are going through is what every trader goes through.  The difference between a losing trader and a winning trader will be how you decide to resolve this issue.  You have already shown you have good risk management skills, which is extremely important.  Now just focus on learning how to make better trading levels.  This too takes time because even though it is very rule-based it is also a form of art and not a science.”

In my opinion, once this gentleman perfects his supply/demand levels his self confidence will soar.  He will still have losses, but I think he will find that with better placed levels on his charts, he won’t be stopped out as frequently.  He has shown he can let his winners run too.  By doing this he has survived his first year of trading with small losses and good winners.

“A quitter never wins and a winner never quits.”  Napoleon Hill

-Don Dawson

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.