“Be­hind Every Suc­cess­ful Trader Or In­vestor There

Dalal Street Investment Journal - - SPECIAL REPORT -

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.

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