The stock market isn’t a beast that is tamable. You will not master it. Ever. You will never devise a foolproof strategy. The ways the market are higher than your intellectual capabilities. In a sense, the stock market has evolved beyond mankind’s own ability to understand the man created entity. Yes, we are capable of conceptually understand what takes place in the market, but the most practical sense; we do not know why exactly the markets moves one way or another. It’s seeming illogical and unjustified in many cases. If this is something you have never experienced, trade or analyze the markets some more and it will become painfully obvious that it’s bigger than you and your “skills”.
Luckily, there’s risk to reward analysis and risk management. As a result of our inability to know the future or the exact nature of a future move, risk management is not only a good idea, but crucial to success in the market. We must take this seriously and plan accordingly.
If we choose not to consider the seriousness of risk management in the market, we will inevitability face the outcome of more losses than gains and ultimately going out of business as a trader. This is not a light matter. This a reality that all traders face, something that I have experienced in my own trading and something that you must continue to improve upon if you are going to improve your trading and profits.
A practical example of risk management is to plan to only lose “x” amount of money, no matter what happens, you decide before ever taking the trade that you do not want to lose more than “x” amount of money. By deciding before hand, you can plan accordingly and will be more comfortable when a loss does roll in. By practicing this, you will not be surprised when you lose money, but in a sense, expect it. You will still be in business, because before the trade even started you were willing to lose money to find out if the trade worked. Risk management is not limited to this, but this a is a crucial part of it.
So, to summarize, here’s the logic:
- The stock market is conceptually understandable
- In practical terms, it’s impossible to predict the market moves
- Therefore, to succeed we need to play defense
- To play defense requires strategic risk management