STREET DOGS

AGOOD trader will focus on risk first — how much can be lost, rather than how much can be gained.

If it is your goal to find winners, how do you act when you experience a big loss? It’s a shock. It’s a big disappointment. It could even discourage you from trying any more.

But, assuming you’re sufficiently determined to go on trading, you will most likely try to shrug off the loss and look to put on more trades to restore your confidence — to keep you thinking positively. In so doing you increase the risk of further losses.

Now imagine your goal is to avoid losers. How will you act when you encounter a big loss? You’re still disappointed, of course, but it comes as less of a shock, since you came to the trade with the attitude that all trades are potential losers. A big loss should be easier to deal with. Also, when your main aim is to avoid losers, you won’t want to miss the opportunity of looking closely into the reasons for one, and learning from your mistakes.

Think about this: 2x2x1 = 4, whereas 5x10x0 = 0. A zero ends it all, no matter how well you’ve done before. If your sole aim is enlarging your profits, you risk eventually going broke. If you manage to stay away from big losers, you don’t run that risk.

A trader that’s focused on gains will ask, “How much do I need to make?” The trader that’s focused on risk will ask, “How much can I accept to lose?”

The trader that’s looking for gains will look for a reason to do a trade. The trader who’s trying to avoid a loss will spend more time looking for a reason not to do a trade. It’s easy to spot the amateurs: they’re more interested in becoming successful traders than in trading.

Michel Pireu — e-mail: pireum@streetdogs.co.za