“Behind Every Successful Trader Or Investor There
If we look around while speaking and interacting with large number of investors and traders alike, one would observe that the concept of “Risk Management” has different interpretations by the market participants. It will be no surprise if we see that majority of market participants, whether they are traders or investors, will start thinking about “Risk” only when the markets are too choppy to handle, or if they are marking fresh highs every day, or if they are caught in a volatile corrective actions. Unless any of these three things happen, we find that the concept of “Risk Management” largely remains neglected.
At this point, we need to correct this perception. Every trader or an investor does have a different mindset. Each one of them has a unique perception of the markets and most of them believe they have a unique trading method which is often perceived by them as “Safe” or “Risk Free”.
This is not true. We need to understand that at no point in our trading or investing career we have been operating in a risk-free environment. Risk has always remained omnipresent in our professional existence as a trader or an investor. There is a golden truth about risk – Risk can never be 100% eliminated. It can only be mitigated”. The sooner we learn this, the sooner we will see our portfolios and capital operating in a risk-mitigated environment, reducing our exposures to uncalculated and unexpected losses. “Risk Management”, as a concept, should be applied methodically and continuously while we are exposed in the markets and not just when a particular situation in the markets arises. Risk management methods should remain perpetual in existence. It is a bitterly learnt lesson for most traders that “You should know your trade well before you execute it”.
While we deal with our portfolios, we have so far concentrated only on the reward side–as we find this more interesting and enjoyable. However, this is just half of the portfolio equation. The other half is the money management and risk management, which deserves equal or sometimes more importance than the first half.
Without going deeply into highly technical methods of risk management, we will try and focus on some simple yet fundamental methods of risk management, which traders and investors can apply in their simplest form.
Embracing risk is more important than measuring risk. Understanding and accepting each day's losses and series of losses is essential for survival. Risk cannot be eliminated, as much as traders try to make each trade a profit or engineer systems to minimize losses. You can move the profits and losses around, but you cannot eliminate them or make them so small that they are meaningless.