Week of 6/13/16: Managing Risk
Here is what we talked about with our full members this week:
- Job #1 is to manage risk-there is a sliding scale of risk management, ranging from 0% (no trading so can’t lose) to 100% (guaranteed to wipe out).
- How does a trader know which point on that scale his risk management should sit?
- What is too safe or too risky?
- If traders are too cautious they won’t make any money, but conversely if they are too reckless they will lose all of their money.
Facilitator: Bryan Stickney
Webinar Length: 9:27
[00:00 – 9:27]
[slide] [Complete Currency Trader – TITLE]
[slide] [Managing Risk]
Bryan Hey, everybody; it’s Bryan with Complete Currency Trader. Thank you for joining me today. It is Friday, June 17th and we are recording our weekly recap of the live classes we typically have for our full members. This week was a short week for us.
As many of you know, I’ve been on vacation for a few weeks, now, and [am] just getting back to it, so, as opposed to having three classes this week, we only did have two classes. We had our normal Wednesday class which was very freeform. We just talk[ed] about some ways to customize trading strategies and look[ed] at different time frames; [did] things that will help our students and our traders who take these courses take these things that we teach them and really customize them to fit their own needs. That’s–that’s key.
As we’ve talked about it before, every trading system–in order to be successful with it, we have to take the components that are taught, understand them inside and out–but, then, customize them to fit us, because we can’t just simply take something and plug it in and have it really be “bought into” by our subconscious in order to really get the most out of it. We need to have something that fits our own, unique personalities. We do that on Wednesdays. We talk about how to customize things and how to create our own system in the larger group that we have within Complete Currency Trader. So, that was our Wednesday class.
Then, on Friday–today–we had our normal foundation class. Every Monday, Wednesday and Friday we talk about the fundamental things that really help us with Complete Currency Trader. It’s key for us to understand because the fundamentals–the basics–that’s what really helps us be successful traders, as well.
We need to understand how the markets work. We need to look at the things that are going to help us think in the right way and get our mind set in the right term for us to be successful and consistent for the long term.
Today we talked about odds and probabilities which is one of those things that is often missed, but I feel like is a very key part to help traders cope with losses, cope with strings of losses and keep their mind[s] from getting too emotional and getting caught up and focusing on that individual trade or that string of individual trades versus looking at things on the overall–[incomplete thought] … That’s huge. So, we dug into that a bit today and we’re going to talk about that.
Managing risk, of course, is paramount when we’re trading. That’s our job number one. We have to manage our risk. Unfortunately, when traders don’t understand odds and probabilities correctly and understand how those attribute to their risk parameters, they often risk too much or use inappropriate amounts of risk: (A) for their personalities, but, also, because of a failure to understand the odds and probabilities.
So we dived in… dove in?–to that today and discussed that a little bit more so that we could help our traders become successful.
[slide] [Gamblers’ Fallacy]
[cont.]… One thing that I really want to bring out–[incomplete thought] … We don’t really have time in these recaps to go into the whole bit there, but, one piece, if there’s nothing else to take from it, is the gamblers’ fallacy. This is something that we see very often in trading, placing their bets on a poor law of averages. I see this, both with the experienced and novice, they seem to think that, because an event hasn’t happened in a while, that it’s due to occur. (Being from Vegas. I lived there fourteen years. I saw this very often–
[slide] [More on this… ]
[cont.]… and I still do when I’m out there.) I love to stand by a roulette table and listen to the conversations of people as they look at the board as they’re walking by. Sure enough, if there’s any kind of a string of hits–maybe where it’s come up red three times in a row, someone will inevitably walk by and say, “OMIGOSH! Three in a row! It’s gotta hit black next; it’s due to hit!”
[The] reality of that ball, just like each trade that you take, is wholly independent of that last trade. The last trade has no impact on your next trade; the next trade has no impact on your next trade. Folks will think because it hasn’t happened in a while now, it’s due to happen!
“Oh, I’ve had five losses in a row. My next one has to be a win so I’m going to increase my risk.”
“My win rate is 90% and I just had a loss. So, therefore, I have to have a win now.”
That’s the gamblers’ fallacy. It’s not true, though; it’s a misunderstanding of the odds. We talk about win rates and we talk about strings of things. That’s based on a large sample size, it’s based on a lot of data. We could take a coin and flip it. (Everyone could do that. You could reach in your pocket right now and flip a coin.) You have 1:1 odds that it’s going to be heads or tails, yet the reality is, it’s not going to go heads, tails, heads, tails, heads; tails. It might do that for a minute or two, but the reality is you are going to get strings where it’s all heads in a row and you are going to get strings where it’s all tails in a row.
The same thing is true in trading. The failure to understand that causes traders to leverage up, to risk more because they don’t really understand that each trade is fully independent of the last–
[cont.]… trade. When we look at win rates, when we look at various things that we’re going to make decisions on, those things are only applicable a large number of trades. We have to have a large sample size and that’s key.
When experienced traders are able to get into the right mindset, they realize that the trade they’re taking right now has nothing to do with their last trade and nothing to do with their next trade. It’s the trade they’re in right now. The odds on that trade (once entered) are 50/50: it’s going to win or it’s going to lose. To enter the trade, the only thing I can control, the only thing that a trader can control is their analysis leading up to the point where they push the button. From that point on, it’s random. The outcome actually is random and being able to accept that and understand that is key for professional traders.
That’s what we talked about today. We really spent some time digging into that. Of course, as we get into next week, we’ll continue on with our foundation work and continue building on the principles that help our members stay consistent and become professional traders over the long term.
Obviously, we’d love all of you who are watching this video to become part of this. A great place to begin is with our introduction course. If you haven’t already, I really encourage you to go to our Web site and take part in one of the directional Webinars that James does and then take part on our introduction course. That course lays an incredible foundation for you to be successful as a trader. It will help you get the right pieces working in the right order so that you can be consistent; be successful, and, then, begin building on that with some of our more advanced offerings. A great place to start is to dive into that introduction course. Hope you’re able to do that.
We also talked about three trades I took. (This is my first week back trading.) We–I took three trades on the U.S. session and we reviewed those with our members. They all had positive outcomes. Two were very good trades with positive outcomes; one was a bad trade with a positive outcome. I talked about that in class, as well. It’s really key to analyze your trades after you take them.
Again, coming back to what we’re discussing today with odds and probabilities… not focusing on the outcome, focusing on the process is key. That’s something we have to do with the trades that we take.
So I mentioned I had a positive outcome and you might ask, “Why was it a bad trade if it had a positive outcome and you made money?” It was a bad trade because I didn’t follow the process. We talked about that, as well, just analyzing your trades; reviewing your trades and being honest with yourself so that you can make notes and take note about things so you don’t repeat them in the future.
Again, all we constantly teach and inform our members as a formal member of Complete Currency Trader, you’ll get that support and you’ll get [unclear 2nd thing to receive] that, as well. Again, I encourage you to start with the intro course, learn what we do and how we do it. Get those building blocks in place so that you can become a successful trader over the long term.
We look forward to helping you grow and watching you grow and, then, becoming a successful trader.
Thanks, very much. We’ll see you next week. ‘Bye.
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