Most businesses have risk which is uncontrollable. Trading business is an exception to uncontrollable risk, still you get to hear every now and then that some Mr. XYZ incurred losses of some X amount in stock market. We can understand the risk involved in carrying position overnight, as the global factors can affect it. During the live market hours risk is totally manageable if you adhere to rules and do not bring in your ego to play.
Let me narrate you a story of 4 blind monks and what they imagined elephant to be.
First blind monk felt elephant’s trunk with his hand and thought that elephant is like a snake. Second blind monk felt elephant’s tail with his hand and thought that elephant is like a rope. Third blind monk felt elephant’s leg with his hand and thought that elephant is like a strong pillar. Fourth blind monk felt elephant’s body with his hand and thought that elephant is like a wall.
Trading is also one big elephant and traders tend to behave like blind monks. They imagine and interpret trading as per their past experiences. Traders do evolve but only after experiencing different facets of stock market which influence their behavior.
Let us now relate the blind monks with different kind of traders and their approach towards risk management.
First blind monk who thought elephant is like a snake represents traders who think that stop loss is like a venomous snake and will kill their profits. They think that making profit from every trade is important and not protecting capital. These traders also go one step higher and say that Stop loss is for people with limited capital. Such traders trade book will display either small profits or big losses only. They are at the phase one of evolution as a successful trader.
Second blind monk who thought elephant is like a rope represents traders who keeps moving from one trade to the another. They are the ones who are in stock market for some thrill. For them taking new trades is important. Their trade book will display lot of trades either exited at breakeven point or with small profit or loss.
Third blind monk who thought elephant is like a pillar represent a trader who respects stop losses and considers them as the foundation of his trading business. They think that managing stop loss is of utmost importance. Such traders will place a stop loss in system as soon as they enter a trade. Their trade book will display trades with small losses, small profits and big profits.
Fourth blind monk who thought elephant is like a wall represents traders who plan their trade and trade their plan. For them, their study is primary and do not get influenced by external news and others opinion. They are regular in updating their knowledge and observing it during market hours. Such traders will have stop loss ready before they enter the trade. They are the ones who will have no fixed targets for profits. They shall have trailing stop loss and try to take maximum out from the trade. Such traders trade book will display small losses and big profits.
Go back to your trade book and you will come to know which blind monk you are. Once you know where you stand then only you will be able to draw a career map for yourself and become a fourth blind monk.
– Dimesh Patel