During these days of increased volatility, damage control is a greater component of success than ever. A healthy respect for risk is one common trait shared by all professional traders and money managers. I recall a common aviation saying: "There are old pilots, and there are bold pilots; but there are no old, bold pilots." This is as true for trading as it is for aviation. In fact, unlike modern aviators, traders do not have the advantage of global positioning systems when they become lost. Instead, traders have to work their way back to profitability on their own.
One common trait shared by virtually all unsuccessful traders is an unrealistic view of risk. Some err on the side of excessive caution, not understanding that a profitable trade can only occur with a certain degree of risk. You can never win a hand if you refuse to ante in.
However, most traders take on too much risk. Electronic trading makes it very easy to put too much money on the table. Money somehow loses its importance when you just see the numbers on your computer screen each day. It's not that much different from playing electronic slots at the casino; put in $20 and the credits show up on a slot machine display. You don't even have to pull the handle anymore, just touch the "Spin" button and the wheels start turning. Before you know it, you've fallen into a nice, easy rhythm: "Bet 3, spin, repeat."
Let's put risk in the proper perspective. This simple table shows how difficult it is to come back from a big loss:
Technical Analysis NDX Bulls Beating the 10 Count 6/12/2006 9:47 AM EDT If they can end the week above 1585, they could make it to July without another blow to the head.
Technical Analysis The Canary in the Mine Is Singing 6/12/2006 11:08 AM EDT The strength of utilities stocks is a bullish sign for the broader market.
Technical Analysis Don't Trust Any Early Rallies 6/12/2006 8:27 AM EDT The market forces align for a strong rally next week, so beware early moves. Also, banks face resistance.
At the time of publication, Fitzpatrick had no positions in the stocks mentioned, though positions may change at any time.
Fitzpatrick is a freelance writer and trading consultant who trades for his own account in Encinitas, Calif. He is a former co-manager of a hedge fund and teaches seminars on technical analysis, options trading and asset-protection strategies for traders and business owners.
Fitzpatrick graduated from the McGeorge School of Law and was a fellow at the Pacific Legal Foundation, a nonprofit public interest firm specializing in constitutional law. He also practiced law in the private sector before pursuing trading as a full-time career. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.
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