Risk Tolerance Test Identifies Problems
Risk Tolerance is the area we are going to discuss today.
How is your risk tolerance? Would you say that you have a good stable risk
tolerance, or is it a big reason you take small losses? Risk Tolerance trips up
more Retail Traders than any other emotional aspect of trading.
Here is a check list of how to evaluate personal Risk
Tolerance:
1. Do you carefully check the Risk to Reward ratio, and only
trade stocks with a good ratio?
2. Do you consider the amount of money you have at risk in a
trade, and think about how you would feel if you lost that money should the
trade go against you?
3. Do you lower your overall market risk by trading more
than one or two stocks at a time?
4. Do you use stop losses on every trade, and have those
stop losses under appropriate support levels?
5. Do you enter trades only on strong market days?
Beginners go to the "Basics of the Stock Market for New
Investors and Beginning Traders" 12 Webinar Lessons.
Here is a Risk Tolerance test.
If any of these apply then you have a personal Risk
Tolerance problem:
1. If you get stopped out of trades frequently and then
watch as the stock moves up, you are setting stops too tightly for the kind of
Trading Style you are using.
2. If you panic as a stock retraces and lower the Stop Loss
Loss after you are in the trade to avoid getting stopped out, then you are
increasing risk rather than lowering it.
3. If you raise the Stop Loss prior to that stock forming a
new consolidation which provides support, you will actually increase the risk
rather than lessen it. You have typically moved it into the retracement area
for the stock and will get stopped out prematurely.
4. If you check profit or loss everyday on a held stock.
Position Traders should only be checking their balance once a month. Swing
Traders could wait until the end of the month, but can do it weekly.
5. If you check your stock intraday to see what is
happening.
6. If you do not use stop losses, and then watch your stock
tumble and are unable to exit.
Go to the "How to Trade the Stock Market Webinar"
for Beginners.
Go to the TechniTrader
The simplest and easiest way to improve your risk tolerance
is to continually paper trade on a Simulator even after you are in the market
and trading live. Certainly most beginners do not paper trade sufficiently
before they jump into the market. They allow emotion to cloud their better
judgment and let greed overwhelm their decisions. I can definitely say that the
stock market is the only business where normally calm, intelligent, and wise
people do really greedy things that end up being foolish and risky.
Our society in the U.S. is geared towards instant
gratification and success, which makes retail traders their own worst enemy.
Retail Traders sabotage their own efforts and skills by panicking while holding
a stock, and deviating from their original plan. Many are fixated on “beating
the market” which is just an emotionally charged notion. The only people who
need to worry about beating the market are funds managers who must perform
quarter to quarter, or get fired.
Retail Traders have one thing to compete against and that is
their own emotions, which causes them to make poor decisions. Competing against
the market, funds managers, or other traders is a complete waste of time and
energy. You must compete against your own prior history to improve results, and
ignore what is going on with everyone else.
Summary
Emotional control comes from having a sound plan, sticking
with it, and not changing it because the market has moved on a whim. If you
create a trading style which is a plan of attack for the market, if you set out
your strategies and use the correct ones for the appropriate Market Conditions,
if you only trade stocks that have a risk factor you can live with, and if you
use stop losses appropriately you will be successful. Problems occur somewhere in
all of this, when retail traders miss a step and deviate from the plan.
Greed is a tough emotion to control, because it is insidious
and hard to identify in ourselves. Fear is easy to identify and much easier to
control and harness. A certain amount of fear is necessary and good in the
market, because it keeps Retail Traders from doing really risky trades. However
fear that dominates the daily emotional energy of a Retail Trader creates
constant losses.
Think about this and study your prior stocks. If your stocks
performed well after you were stopped out, then there is a risk problem.
TechniTrader
The Gold Standard in Stock
Market Education
Trade Wisely,
Martha Stokes CMT
Chartered Market Technician
Instructor and Developer of TechniTrader® Stock and Option Courses
TechniTrader DVDs with every course.
©2016–2024 Decisions Unlimited, Inc. All Rights Reserved.
TechniTrader is the Registered Trademark of Decisions Unlimited, Inc.
Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor, it is strictly an educational service.