c17 JWBT016-Busby September 30, 2008 14:43 Printer: TBD
168 THE WILD CARDS
opportunity to turn a winning trade into a loser. By using the approach
outlined above, even if my ultimate profit target is never reached, I am gen-
erally able to walk away with some profits. Also, even on my bad trades, I
am able to reduce my loss.
Another way that this strategy can be used is to phase into positions.
For example, maybe you feel reasonably comfortable about taking a po-
sition but want to move forward with caution. Take a small position as a
probe. If the trade works and is confirmed by a move in your favor, add to
the position. For example, if you take a probe to the long side and a big re-
sistance number is broken to the upside, add to the position and ride it up
to the next point of resistance. Be sure to use stop/loss orders and watch
the trade carefully.DIVERSIFYOne of the safest ways to control risk with your overall portfolio is to diver-
sify. Don’t put all of your eggs in one basket. When the technology stocks
took a beating in 2000, many people suffered huge losses because the bulk
of their investments were in that sector. Profits had been so strong that they
ignored the basic principles of diversification and put everything into the
high-tech sector. When the Nasdaq dropped, their portfolios were slashed.
The Nasdaq has still not even recovered to the 50 percent level of those
highs seen prior to the crash. Do not put your long-term stock portfolio in
only one sector. Even if profits are good, the picture may change and you
need to be prepared.
In addition to diversifying the portfolio among sectors, diversify among
different types of assets. Balance the portfolio with bonds, real estate, and
perhaps even commodities and precious metals. If stocks go down, gold
should go up. In the current market, oil is strong and getting stronger as
time passes. The more diversification you have, the more resistance you
have to market conditions.Review
No market strategy can succeed without good risk management. As a
trader, you must respect risk and preserve your trading capital. When you
get into a trade, know where you will take profits and where you will get
out if prices move against you. Do not use mental stops—it is too easy to
become mesmerized by prices and lose too much money. If the stop/loss
order is placed when the order is executed, it will save you money.