Saturday, August 12, 2006

Evaluating Your Risks - Risk Management

Many of our speculation rules deal with risk management.

There are many risks you can strive to understand before you enter your trade, this constant evaluation is an important part of speculation. You can then weigh these anticipated risks against potential gain and decide to pull the trigger.

Then everything changes.

Before the trade you knew there was no way to find all the risks, you just considered ones that you could locate and understand. After you are in the trade your personal psychology tries to take over.

  • "It's just a small drop - it'll come back."
  • "I have a profit - no one goes broke taking a profit."
  • "I've been in this a week and nothing has happened."
  • "The government did what? - Maybe I'll just sit and wait."

Your decision making process is always the least clouded when you are out of the trade. That is the time to make your important trading decisions including:

  • When will I enter
  • At what point, time and price, will I know I was wrong
  • What is my target for the move
  • At what exact point will I exit if I am right
  • what would be a good distance for a trailing stop loss

Write this down in a personal trading journal before you trade - and follow your own clear headed decisions.

If a major surprise happens in the investment landscape - consider exiting and subsequently evaluating without having your money in play.

When you are out of the trade - write down the results, what you did right, where you can improve. Your trading journal may become one of your most
valuable trading tools.

A couple of old investment saws that you can use as speculation rules:

If you fail to plan - you are planning to fail


Plan your trade - then trade your plan



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