Be Humble. And Take Care of Trading Risks.

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Be Humble. You Could Be Wrong.

This nice picture which I recently saw on Pinterest (thanks go to theyallhateus.com for that), almost sums up all there is about risk management in trading on the financial markets. Be Humble. You Could Be Wrong.

Unfortunately or not, trading in the financial markets, including the FOREX one, involves much more emotions than many of the players and analysts are inclined to admit. Behaviorists and psychologists would tell you that aggression is hardly regarded as a feature of the humble ones. Neither is being mad at something. This is almost the same as the first Karate principle (for applications of those principles in currency trading, please see my “Karate Principles In Trading And Portfolio Management” series of articles:

1. Never forget: karate begins with rei and ends with rei (Rei means courtesy or respect, and is represented in karate by bowing).

Respect and humbleness often walk hand in hand. Humbleness stops us from getting so greedy that we would forget about the risks altogether. Because at the end, it is all about the risk. In order to successfully increase our capital, we should first properly protect it.

Being humble allows the trader to better assess the risk to the whole portfolio which each position carries. This is achieved by not neglecting any position in favor of others. If we get too confident in our opinion about a position because of pride (caused by past performance, falling-in-love with a position, etc.), we could easily neglect some early warning sings. The cost of this could be our inability to react in a timely manner to the changed market conditions.

Humbleness allows us not to always use the full leverage available to us without first counting the cost. In many cases having that extra resource is the difference between a success and a failure. A humble attitude also allows us not to argue with the markets when we are wrong but adapt ourselves quickly enough to continue trading. It allows us to take quickly our loss when market conditions change and we no longer see perspectives for a certain trade of ours.

This does not mean that traders should not act fast enough, if needed, but that they would survive better if they assess properly the risks. There is a famous saying that “pride comes before the fall”. When we compare ourselves with others in order to see if we look “better, bigger, stronger” than them, we move our focus away from taking the right actions. We focus on pleasing our ego. And money has no ego. It prefers to go to the ones being right. Money is the fruit we collect in our trading journey. Along that FOREX or equity trading journeys we also collect knowledge: knowledge of ourselves and knowledge of others. And we learn to make the right decisions. Looking for signs that we are wrong in our decisions the moment we make them, is the first step in improving our decision process. Furthermore, reflecting on our positions regularly gives us the ability to focus only on the best ones by dropping the positions we see as no longer favorable.

As a conclusion, I would like to share some quotes on the topic by two of the most prominent stock and global market traders – Jessy Livermore, an American stock and commodity trader from the Great Depression years, also known as the “Great Bear of Wall Street”, and Paul Tudor Jones II, the founder and manager of Tudor Investment Corp.:

  • “Every day I assume every position I have is wrong.” Paul Tudor Jones II a
  • “Markets are never wrong, opinions are.” Jesse Livermore b
  • “I’m always thinking about losing money as opposed to making money. Don’t focus on making money, focus on protecting what you have.” Paul Tudor Jones II c
  • “The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear.” Jesse Livermore b
  • “You adapt, evolve, compete or die.” Paul Tudor Jones II c
  • a: Source | b: Source | c: Source

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