TRADING:

SPECULATION

AND RISK

 

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All forms of speculation in markets entail risk. Another word for risk is probability. To engage in risk taking, one attempts to measure the probability of things going right, and things going wrong. The very notion that the world decides on a price of a commodity or a stock at the end of a trading day, and then decides to change that price the very next day, should tell you a lot about the nature of the market place and speculation.

 

The Nature of the Trading Environment  

 

It is an emotional environment. What you see as market movement is partly due to speculator's reactions to news events. Part of it is due to irrational and aggressive probes into price territories, driven by fear and greed. The job of the market place is to guess what the value of the market is today. The market mostly functions with balance and equilibrium. When prices move too far one way, they often come back the other way.  However, the market can also stay imbalanced for a very long time.

 

Interestingly, the market never learns its lesson, and decade after decade, the history pages are marked with excessive speculation in housing markets, stock markets, and commodity markets. Former Fed Chairman Alan Greenspan politely called it irrational exuberance. If you trade markets for even a short period of time, you will witness bouts of irrational exuberance as well as bouts of irrational depression.

 

Quiet markets are no less risky than volatile markets. You can quietly lose money in directionless meandering as easily as in markets that are moving wildly.

 

 

 

 

 

 

 

 

 

 

The Reasons for Risk Disclosures

 

When you open a trading account you will be asked to read and sign a disclosure document provided by the regulatory bodies that will list all of the possible ways in which probability can harm your assets. This is a good thing.

 

The regulatory bodies are trying to tell you that optimism about success can be overstated and imbalanced by friends, associates and professionals in the service industry who stand to make a living facilitating your trading account. The over whelming majority of these professionals are ethical, but there is a natural conflict of interest to overcome, when commissions are the form of revenue for the sales person. This would apply to any industry where commissions are the base form of revenue. 

 

Other More Important Reasons for Risk Disclosures

 

The market is a wonderful trading forum in which one can excel beyond their expectations but it can also be a forum for disappointment if one enters the trading arena ill informed, unprepared, and with no experience. It can also be a forum for disappointment if one abuses their trading account out of ignorance or willfulness.

 

There is no amount of education or training that can overcome erratic behavior created by emotional trading practices or by traders who abuse their accounts.

 

Likewise, there are no methods or systems that can guarantee success even when past successes have been very good. Trading is skilled based. It is a performing art and it is the responsibility of each individual who trades to understand that losing is a part of the process of winning.

 

Losing and Winning

 

Losing, just like winning, is necessary in order to gain experience. There are good losses and bad losses. A good loss is a trade that is well planned and executed, where the market has not cooperated.  Bad losses come from trading out of frustration, anger, boredom, and omnipotence. The bottom line is that although a loss is still a loss, a trader needs to take full responsibility for his or her actions, even when the market does not cooperate.

 

Anyone can be the recipient of bad luck. You might have heard the phrase "Good luck is when preparation meets opportunity". I have a phrase for bad luck. "Bad luck is when lack of preparation meets Murphy's Law."

 

Preparation

 

Prepare yourself well before trading and if you find yourself constantly feeling like you are the tail of the dog, well then you are. Learning to trade is first about getting to know the dog better. You can never train the market so thatís where this metaphor ends. You must train yourself to see the behavioral patterns that are high on the scale of probability and then trade the predictable path.

 

Always have a plan and an escape route so that when, not if, the market behaves unpredictably and moves off of the path, you will know what to do. You can do a reasonably good job of learning how to assess that things are not going your way. If you have given the market an ample opportunity to behave as expected, but it still remains un-cooperative, then a defensive action will save your equity for better use, when the market is behaving well.

 

This information on this website is for educational purposes only.  Trading with this information is done at your own risk. All concepts and writings including the Novy Training/Trading Method NTM©, Novy Principles of Market Flow, and Training for Traders are proprietary and the sole ownership of Leonard A. Novy and may not be reproduced for profits without expressed written permission. Copyright1995-2006

 

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