You, and you alone, should determine your own personal levels of risk — and stick to them.
From Janice Dorn, “The Trading Doctor”:
Beginning traders and investors are almost universally surprised to hear that trading and investing involves losses. Their view of the markets is skewed and distorted by the barrage of hype, commercials, advertisements and seminars offering instant riches. They see themselves quitting their day jobs and sitting in their pajamas watching red and green lights (or some virtual genie market guru looking over their shoulder) as they make buckets of money every day. After all, if Jane and Joe Q. Public (all happy and smiling with the new car and house and boat in the background of the TV commercial) can do it, so can you. Right? Highly unlikely. Wrong? Very probably.
What you are not told in these ads and seminars is that the combination of emotions and money management must be harmonious in order for you to be profitable on a consistent basis and that nothing good comes easy. That’s the bad news. The good news is that YOU have absolute control over how that works out, and the secret is in money management. Money management is about how and when you enter the markets and how much you risk at that moment in time. No matter what else is going on, you are in charge of this, the choice is yours and you take full and complete responsibility. It is your brain making that decision.
Trading is among the most challenging of any activities. It means swimming every day in water infested with money- hungry sharks, waiting to devour unprepared and unsuspecting victims. There are always (and I mean ALWAYS) going to be losses. New traders, and even those more seasoned, often fail to grasp this. Losses are personalized, and internalized, leading to a sense of failure, a decrease in self-esteem and an exacerbation of deep-seated shame and guilt. Inexperienced traders equate losses with being a bad person, a failure or just plain stupid.
Seasoned traders see losses as part of doing business, and view each trade as one in a series of probabilities. They set entries, exits and stops and adhere to them religiously. Inexperienced traders do not know how to manage money through managing risk. They do not understand that it is necessary to take calculated risks as part of doing business as a trader. There is always risk. Those who understand this, who embrace it and move with conviction in the face of it, are the ones who will succeed.
How does one do this? First of all, you determine your trading personality (your Money Brain) that then determines your risk tolerance. You decide the amount of money you are going to risk on any trade and the percentage of your capital you are risking. These are decisions you make, based on your analysis and your particular brain structure and function. You absolutely never ever allow the market to determine your risk.
Let me repeat that: YOU determine how much you will risk. You do not allow the markets to determine that for you. In approaching the markets, you realize that so many things are out of your control completely. The market doesn’t know you, your rules or anything about you and doesn’t care. Having grasped that concept, you do what you can to control what you can control…..YOUR OWN PERSONAL RISK. This is a fantastic opportunity for you to make your own rules and to keep them. If you break your rules you are, in essence, breaking a promise to yourself and being out of integrity with yourself. You are lying to yourself.
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