This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

The 4 Biggest Mistakes in Stock and Futures Trading Strategies, Part 3

Part 3 of 4

NEW YORK (TheGoldAndOilGuy.com) -- Mistake #3 -- Failing to Control Risk

If you were to engage in something risky like skydiving, you or a team would check your parachute to be sure it's packed properly, strapped on to your body correctly before you jumped out of the plane.

If for some reason you were not told how to use the gear, like when to pull the ripcord, etc., I guarantee you would ask before you threw your body out of the plane. There is a real fear of dying, so you naturally make sure you are in control of what you are about to do so your risk is managed and you can live another day.

But when it comes to trading, this is not the case. You and I both know a good part of why. We all know people who have said rude things, quit jobs or broken up with a girlfriend or boyfriend over the Internet (email/text message).

Let's face it, it's easy to be brave online and do things we would never really do in person. Heck, some of the emails I get from readers are so rude and some are threatening that all I can do is laugh. Because I know these people would likely never say the things they did to someone they have never met, and do it to their face because they think my short-term market prediction does not fit their bias. I think you get the point here.

So when it comes to trading, individuals get this what I call "online courage," and this is why so many fail to protect their capital when trading. They simply don't see their money, so it does not feel at risk (out of sight is out of mind). This lack of fear is what leads to loss of risk control.

How to Avoid Mistake #3

Must Read: Jim Cramer's 6 Stocks in 60 Seconds: PKI WYNN LINE HFC WEN BSX (Update 1)

There are a few things that can and should be done to control your overall risk when trading. The first one is diversification. Not having all your trading capital in one investment allows you to spread your risk between other investments with low correlation -- meaning if one of your positions moves down, another one should be moving up in your favor.

The second is diversification between time frames. Having multiple positions based on different time frames can provide an overall lower volatility in your portfolio. For example, you could be long the daily chart for a swing trade that should last a couple weeks, and you may be short the 60-minute chart because you expect a shot-term pullback. Time diversification is overlooked by many traders.

Third is through position sizing. It's better to have a few smaller positions spread captial over various investments than it is to have one position in only one investment (eggs all in one basket).

Finally, the last and one of the most important is the stop loss. They are commonly referred to as money management stops. They are not used to increase your positions performance. Instead, they are there to protect you from unnecessary loss if the market moves against your position.

Keep in mind when I say protective stop, I don't mean a mental stop (one floating around in your head) I mean a read stop loss order that is live in the market. Risk control should never be an option, it's a must!

In short, risk control will not singlehandedly allow you to beat and profit from the market. But without managing your risk you have no hope of winning in this industry. The key is to stay in the game long enough to start seeing gains and allowing your money to compound over time for above average returns.

Stay tuned for part 4 in this series, Lack Of Self-Discipline!

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Chris Vermeulen is founder of the popular trading sites www.thegoldandoilguy.com and www.ActiveTradingPartners.com. There he shares his highly successful, low-risk trading method. Since 2001, Chris has been a leader in teaching others to skillfully trade in gold, silver, oil and stocks in both bull and bear markets.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
AAPL $123.27 0.41%
FB $95.30 1.20%
GOOG $628.09 0.13%
TSLA $264.41 4.50%
YHOO $37.76 -0.19%

Markets

Chart of I:DJI
DOW 17,622.75 +182.16 1.04%
S&P 500 2,093.00 +25.36 1.23%
NASDAQ 5,085.9690 +46.1930 0.92%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs