So is all trading necessarily live by the sword, die by the sword? No, there is another way, which is to manage one's risk well. It is disciplined risk management that is the hallmark of a successful trader, because managing risk will keep you in the game for the rest of your career; whereas picking the right stocks or making a ton of money carries no such assurance.
Of all the risks that must be managed, the biggest is yourself. You must make an effort to discover your weaknesses and then find a way to neutralize them, perhaps by implementing rules that you must follow. For example: don't buy more than 12 positions. Stop trading if you lose more than 3% in a month. Don't put more than 1% of your portfolio at risk on any one position. An excellent book on this subject is Dr. Alexander Elder's Trading for a Living
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I wanted to talk about one of my weaknesses as a trader. I have a fondness for the gold sector that can sometimes cloud my judgment. This got me in trouble earlier this year when gold hit $1,000/oz and I thought it was onto $2,000 right away, but instead it began Wave A of a massive correction. Just like now, I was overleveraged to gold, and in addition I committed a cardinal sin of trading: I pulled my sell-stops. I was so sure that gold was going to new heights that it took double my pre-planned loss for me to realize that I was wrong and subsequently sell. It was a sickening feeling to watch those stocks drop down, down, down from my sell-stop, which was already quite a ways down from my purchase price.
That whole period was a big blow to me, not to mention my account equity, and I felt like a loser. Not because I was wrong, but because I failed to manage my risks, which is basically what I do for a living. Not only did I take on too much exposure to the sector, I couldn't admit I was wrong when the evidence was right in front of me: price had fallen through my sell stops. This was a time in my career when Dr. Elder's book helped me a lot. I took double the loss that I should have. At least I actually sold my shares, and then put that money to use on trades that worked. My account actually hit an all-time high last week; meanwhile the stubborn holders who still can't admit they were wrong are down 20%!
A definition of insanity I've been seeing a lot lately is doing the same thing over and over again, expecting different results. As a trader, insanity is deadly, and I'm determined not to do insane things. However, in one respect I've already failed: once again I took on too much exposure in my personal account to the gold and basic materials sector, as I mentioned in my prior post. For my account, I would consider up to 4 positions in gold and related sectors within reason, but I had almost double that number. On Friday I sold 2 of my positions for losses in order to balance my risk. This was a move I had to make, even though the charts for gold and basic materials remain unbroken, because I had to compensate for the mistake of taking on too much risk. Many people are unwilling to take losses, and must wait for breakeven before they sell (this is why support and resistance work). But breakeven may never come, so the prudent remedy to overexposure is to sell at market to bring that exposure down to an acceptable level.
Now I can breathe a bit easier, sit back and see what happens. If gold breaks to the upside and hits the 200-day moving average, I'll be out with an overall profit. If gold falls below the pivot point of August 26th, I'll be out with a loss slightly higher than what I would normally find acceptable. I may even sell another position on Monday to bring my risk more closely in line with what I deem acceptable. In any case, I'll continue to watch the sector closely, because a run to the 200 will happen sooner or later.
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