Trade The Journey

Trade The Journey

How much should you risk?

How much you should your risk?

Ideally, you should be risking an amount that you are comfortable losing. If you visit any financial website, it will say this in almost bold letters. However, it should be emphasizing another aspect to risk, which is that it exists in almost every investment and that you should embrace risk not fear it. Although most people are not aware of this, your money is always being risked. Whether you are holding it in a bank account or in cash, it is at risk albeit small, it is at risk. With the way things are going, it may be more at risk than you think.

Embracing the inevitable, which is that you are destined to make mistakes and losing trades, will help you make better trades on both ends. Removing the thought of being always right, will allow you to see opportunities where you or the public could be wrong thus becoming profitable.

The best traders spread out their trades and risk less than 10% in each trade. This is not a hard rule but more like a precaution to the different enticing opportunities that arise that may not be the best in the long term. Risking some of your capital and risking close to all of your capital are quite different strategies.

In another post I wrote, I tried to convey that economic calendars can be a helpful tool in investing and here is one area. Knowing the direction of the economy can be twofold, opportunities and threats. The threats can be serious and magnified with horrible investment decisions. The cost of replacing the capital loss can be more expensive for you during bad economic times. Opportunities can also be spotted as well.

The hardest part, I have seen so far in investing/trading is separating your “Ego” and what you think is going on from what truly is going on.  The best remain objective. For instance, looking at my economic calendar I can see that Mortgage Bankers Association releases a weekly rate for various mortgage applications submitted. These are potential home sales, a leading indicator of home sales by 4-6 months. How can we use this indicator to make an educated guess about the direction of the economy?

It is down from 2.0% to 1.6% which we can see is a decline in potential home sales in the future. Does this mean that the economic sentiment is slowly changing? Maybe confidence in the economy is wavering because of the political climate and what may be in the future. People are less willing to make long-term investments. If this starts to happen, this may not be the opportune time for risking more than we could afford to lose. But this also can be an opportunity for those with excess capital.

Probably the best way I’ve heard to manage risk is to separate your accounts. Keeping your investment money, bill money, savings money and spending money in the same account can be a recipe for disaster. Applying this principle to my life has helped me to save money that is completely separate from money I am willing to risk.

Risk can be an opportunity to learn, an opportunity to shy from or an opportunity to embrace. It cannot be avoided, only strategically used to make better decisions.

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