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Seeking Protection from Loss

You must risk money to make money. It is sad, but true. You cannot possibly make profits in the markets unless you take some risk. Many people hate taking risks, especially with their money.

However, risk is a part of everyday life. We take risks all the time, even when we complete the most mundane tasks, such as driving our children to school, or flying home to visit our family for holidays. We even take risks while staying home. For instance, we could slip in the bathtub. We can't escape risk, but we can take reasonable precautions to protect our interests. When driving down the street, for example, it's prudent to wear seatbelts and drive carefully at a safe speed. When it comes to trading, it's also vital to have proper protection. Adverse forces may go against your trading plan, so unless you protect yourself, you run the risk of getting hurt. In trading, that often means substantial hits to your account balance.

We must be able to handle risk in order to trade profitably. When we are afraid to take a risk, we shrink back, paralyzed and defeated. What can we do? On any given trade, we can alleviate some of the fear by risking a small percentage of our trading account on a single trade, and taking it "one-trade at a time" instead of focusing immediately on the onerous goal of achieving a specific return across the entire series of trades. If we can avoid ever thinking of the long-term goal of huge success, we could probably trade forever without hesitation.

There are other obvious ways to feel protected and safe. For example, you can use a protective stop to help make sure that you restrict the amount you can lose on any given trade. By looking at the past performance of a stock, you can estimate an ideal stop loss point that protects you, but does not allow you to get "stopped out" too early. Perhaps the most important form of protection, though, comes in the form of a well-developed trading plan. If you know specifically when to enter and when to exit, you can execute the plan even while feeling afraid of losses. You can easily follow your plan, freeing up your mind to focus on your immediate experience rather than the long-term consequences of a trading loss. It's also important to anticipate adverse events as part of your trading plan. Make sure that earning reports or an interest rate hike announcement isn't going to ruin your trading plan. Careful and precise planning is the best way to protect your account balance.

Just like engaging in a dangerous sport, you feel better when you know that you have some form of protection. Athletes protect themselves with helmets, and airbags and seatbelts protect us as we drive in rush hour traffic. Successful trading also requires adequate protection. Protection not only ensures that you can survive to trade another day, but it also allows you to feel relaxed while you execute and monitor a trade. So, protect yourself. If anything can go wrong, it usually does. You don't have to worry, however. If you take precautions, you'll survive the inherent setbacks in trading, and end up winning in the long run.


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Saturday, 22 June 2024

Derivative transactions, including futures, are complex and carry a high degree of risk. They are intended for sophisticated investors and are not suitable for everyone. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, and all of which can adversely affect actual trading results. For more information, see the Risk Disclosure Statement for Futures and Options.