Many people do not trade on the stock market because they are scared of the risk involved. A healthy respect of risk is good for an investor, just as a professional motorbike racer must be aware of the dangers of making a mistake. However you will never be a successful trader, or a professional motorbike rider for that matter, if you are not willing to push yourself to the limit and try to make the most of every turn in the market.
The best way to maximize profits and minimize risk is to create your own system or plan that fits your personal circumstances and perception of risk. A good trading plan consists of three basic steps or elements. First you must define the risk you are prepared to accept, second you have to develop a flexible investment plan and third you need to build your knowledge base of trading in a systematic way.
Let’s see how this can be done in practice:
Define your risk.
This is one of those simple principles that are easy to understand but very difficult to put into practice. It is no secret that traders have the potential to make huge profits and huge losses. Traders need to decide what level of risk they can accept. The idea is not to risk more than you are willing to lose. In other words do not bet the farm when trading. You need to decide what the maximum risk you are willing to take is and stick to it. Because trading can be so much fun it is easy to get carried away; self control is one of the hardest lessons to learn.
Once you have decided what your maximum position loss is you can create strategies that maximize your profits based on the risk you are willing to accept.
Develop a Flexible Investment Plan.
Too many traders shoot themselves in the foot by being too rigid when following an investment technique. Maybe they are happy with the results a particular technique has provided and want to stick with it. However, there is not one right strategy for all circumstances. It is much better to have a box full of tools that are right for each situation.
This will allow a trader to have a flexible matrix of strategies that allow him to respond to market movement in any direction. The market is full of traders that respond to changes in the market in a predictable way. Every change in the market resets the expectations of where it will go next. Bear traders will bet for a drop in the market while bullish traders will look for a rise. These two extremes in trader personalities will constantly try to outmaneuver each other.
This mood in the market creates potential for profitable investments if you are capable of taking a step back and seeing opportunities where others see obstacles, instead of just sticking to one trading technique.
Build your knowledge base.
The best doctors are those that never stop learning. If they do not keep up-to-date they will soon be outdated and will not be able to offer the best treatment. The same applies to traders; the most successful are those that never stop learning new and improved trading strategies.
