c17 JWBT016-Busby September 30, 2008 14:43 Printer: TBD
162 THE WILD CARDS
his strategy unless they can afford to take the same level of risk that he is
able to comfortably take. Never take a trade if the risk is too great for you
and your financial situation. Always determine how much you can afford
to lose. If you will suffer dire consequences if the trade is a bad one or if
you will lose a lot of sleep worrying about the trade—do not take it. No one
likes to lose money, and we all get angry when the market takes anything
from us. However, there is a big difference between losing some spare cash
and losing the rent money or the mortgage payment. I firmly believe that
if risk is considered first, the rewards will come. Never enter a trade until
you know the risk involved and are able and willing to take those risks. I
teach my students a number of strategies to help them preserve capital.Three Strikes and You Are Out
On the ball field, a batter gets three strikes and then the umpire calls him
out. Whether he likes it or not, that batter is leaving the field for the dugout.
He is no longer standing at home plate swinging a bat. Even though there
is no umpire standing beside you as you trade, you need to call yourself
out after three strikes. In other words, if you take three trades in a row and
all three are losers—STOP. Something is wrong. Your analysis is faulty and
you are not reading the tape correctly. Or the market is not responding as
usual. Maybe some external factor is altering prices or something else is
happening. The reason really does not matter. The important fact is that
you are off your game. Sometimes it is possible to manage losses well and
not lose a great deal of money, but that is not the issue. Regardless of the
amount of monetary loss, if you have made three bad trades in a row, close
the trading platform and do something else. It is not your day to trade.
Some traders apply this rule to their weekly trading. If during the
course of any given week they make three bad trades, they stop. When
the strategy is not working or the execution of the strategy is faulty, con-
tinuing to trade will merely pile up losses and deplete the trading account.
As the old adage goes, “Stop while you are ahead”—or at least before you
are too far in the hole.Limit Risk
I hold my losses down by never risking more than a small percentage of
my overall portfolio on any trade. If possible, risk only a small percentage
of the account balance on any trade. In that way, if you make several bad