Friday, February 25, 2011

What makes a great trader? Managing risk

Found these excellent comments on trading from Fullcarry and had to favorite and share these tweets.
 

One of the best traders I ever met was never right.Fri Feb 18 20:17:18 via TweetDeck


It was one of the few woman traders I ever worked with. She just new how to trade and manage positions, but was terrible at calling things.Fri Feb 18 20:20:06 via TweetDeck
 
Amazing how quickly these pearls of wisdom can dissipate in the real-time information ocean of Twitter if you don't happen to spot them at the right time.  

Incidentally, this is why I try to favorite (Twitter's bookmark function) tweets and check up on my favorite Twitter lists. You never know what you'll find, or what you might have missed if you didn't happen to catch it in your stream. Wish Twitter would improve its archived search features so users could easily uncover more great information like this, but that's a topic for another day. 

Back to Fullcarry's notes: what's amazing about this particular insight on trading is that it goes against the grain of conventional thinking on successful trading and investing.

So many outsiders, and many trading books and programs aimed at a mass audience, operate on the assumption that you need to aim for a high percentage of winning trades ("high probability outcomes") or that you must be right most of the time to make it as a trader.

As Fullcarry tells it, just the opposite may be true. You don't have to be right on all your calls (or even half of them) to be a profitable trader. You do have to know how to manage your trades and your risk.

After I had saved these tweets last week, I happened to notice a great post by Darvas Trader that ties right in with Fullcarry's message on managing trades and risk. It's called, "The Dirty Little Secret of Successful Trading" and it makes a similar point about relying on winning percentage vs. managing risk.

Quoting Darvas Trader:

"
Risk management is the single biggest determining factor in the long-term success of a trader."

Great study material for traders and investors who are learning to apply some form of risk management to their trading or investing method of choice.

Of course, you could always go the big-shot fund manager route and tank your investors' returns (by refusing to take losses and managing risk) after a big winning streak, but maybe the disciplined approach is more useful for those of us who manage our own money, away from the media spotlight.


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2 comments:

Anonymous said...

p & l traders are the people to watch if you want to see what you're talking about in action

Kirk Meyer said...

Thank you for your informative post.What i'd learn,is before you start trading you need to learn as much about the stock market as possible.I also read a few books about investment gurus and do some research about trading.