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KNOW THY RISK
http://www.netpicks.com/know-thy-risk/
This is a cautionary tale of trading
greedily. Although it’s just one
example, the story is echoed across
the trading world in one form or
another.
When you see increased volatility you
must know thy risk if you’re to trade
profitably and avoid a blowing your
account.
When markets start to move a lot, it’s
easy to understand why traders want
to get involved.
This is especially true after a period of
inactivity.
But in any case, increased volatility
whilst being a great provider of
opportunities, also elevates levels of
risk –
more movement means more trading
opportunities and greater chances of
bigger profit targets being achieved,
but it also tends to require risking a
larger number of ticks in order to find
out whether or not the trade will
work.
Take crude oil for example. It’s a
market that’s really been moving a
great amount recently and has taken a
nose dive. It’s been ripe with
opportunities to make some tidy
profits, but if you don’t accept that the
risks involved are higher than normal,
it’s a very slippery slope indeed.
Trading CL is never for the faint of
heart, but more recently the volatility
has increased considerably. The added
volatility and the fact that it has been
largely directional, has contributed to
people wanting to make a fast buck
out of the market.Know thy risk
If you normally trade CL and don’t take
into account the increased volatility,
trading is going to be pretty hazardous
for you.
It can potentially be like doubling
your normal trading clip size for
example, if you fail to reduce your
real size.
If however, you don’t normally trade it
and worse still, you normally trade a
product that moves far less, the
situation can be far worse.
It might be like quadrupling your size if
you don’t trade really small size –
where one or two false moves could
see weeks or months of hard graft in
your core markets, wiped out in
perhaps a handful of sessions or even
just a few hours.
If you really must trade a market when
volatility increases, there are a few
things that you really need to do
before placing a trade.
First of all you should back-test the
strategy that you intend to trade it
with, just like you should normally –
you have to understand whether or
not the strategy is effective in the
specific market you’re looking at and if
there are particular times you should
avoid.
You also need to know what the
expected level of movement is in the
market and therefore what the
average risk per trade tends to be.
If you’re trading even a handful of
contracts in your primary market, you
can reduce the corresponding clip size
you trade in the more volatile market
in order to reduce risk and bring it into
line with your main market.
If you see a market moving
aggressively and want to get involved,
you can’t expect to start trading it and
effortlessly make money over traders
who intimately know the market.
Just as there’s the opportunity to make
huge profits in these sorts of
conditions, there’s also the chance of
taking some big losers.
So entering the market without
accounting for the added risk can be
very dangerous indeed.
Know thy risk and stay in the game.
Know Thy Trading Risk

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Know Thy Trading Risk

  • 2. This is a cautionary tale of trading greedily. Although it’s just one example, the story is echoed across the trading world in one form or another.
  • 3. When you see increased volatility you must know thy risk if you’re to trade profitably and avoid a blowing your account.
  • 4. When markets start to move a lot, it’s easy to understand why traders want to get involved. This is especially true after a period of inactivity.
  • 5. But in any case, increased volatility whilst being a great provider of opportunities, also elevates levels of risk –
  • 6. more movement means more trading opportunities and greater chances of bigger profit targets being achieved, but it also tends to require risking a larger number of ticks in order to find out whether or not the trade will work.
  • 7. Take crude oil for example. It’s a market that’s really been moving a great amount recently and has taken a nose dive. It’s been ripe with opportunities to make some tidy profits, but if you don’t accept that the risks involved are higher than normal, it’s a very slippery slope indeed.
  • 8.
  • 9. Trading CL is never for the faint of heart, but more recently the volatility has increased considerably. The added volatility and the fact that it has been largely directional, has contributed to people wanting to make a fast buck out of the market.Know thy risk
  • 10. If you normally trade CL and don’t take into account the increased volatility, trading is going to be pretty hazardous for you.
  • 11. It can potentially be like doubling your normal trading clip size for example, if you fail to reduce your real size.
  • 12. If however, you don’t normally trade it and worse still, you normally trade a product that moves far less, the situation can be far worse.
  • 13. It might be like quadrupling your size if you don’t trade really small size – where one or two false moves could see weeks or months of hard graft in your core markets, wiped out in perhaps a handful of sessions or even just a few hours.
  • 14. If you really must trade a market when volatility increases, there are a few things that you really need to do before placing a trade.
  • 15. First of all you should back-test the strategy that you intend to trade it with, just like you should normally – you have to understand whether or not the strategy is effective in the specific market you’re looking at and if there are particular times you should avoid.
  • 16. You also need to know what the expected level of movement is in the market and therefore what the average risk per trade tends to be.
  • 17. If you’re trading even a handful of contracts in your primary market, you can reduce the corresponding clip size you trade in the more volatile market in order to reduce risk and bring it into line with your main market.
  • 18. If you see a market moving aggressively and want to get involved, you can’t expect to start trading it and effortlessly make money over traders who intimately know the market.
  • 19. Just as there’s the opportunity to make huge profits in these sorts of conditions, there’s also the chance of taking some big losers.
  • 20. So entering the market without accounting for the added risk can be very dangerous indeed. Know thy risk and stay in the game.