Now after we talked about managing psychological risk in trading, now I will give you another key in trading, which is to know when NOT to trade.

Sometimes traders loose control because it is too hard to make some money, leading to overtrading. Mostly, this can be caused by the market condition changes, which is a challenge to adapt to. So as I told you in the previous post, the particular trader tends to trade for psychological reasons, not for logical reasons. There’s a big chance that this trader can reduce their own win rate, for example from 55% to 45% when overtrading.

So here’s the key: traders should limit their daily losses, and take some time out. Without limits on daily losses and a process for taking a time out, that trader can blow up in a short amount of time.

Let’s start to talk about the changes of the market, shall we? Market conditions change periodically, one’s edge in trading is never fixed. We go through periods of greater or lesser edge. For that reason, a central skill to long-term success is recognizing when your edge is eroding and pulling back from risk taking.

Now the example part. In the 2005 and 2006, there were low volatility and traders who did not adapt to those conditions and reduce their profit expectations (per trade, as well as per week and per year) fell down before the better condition in 2007 and 2008. Another example is the technology boom in the late 1990s. Many daytraders who were successful that time failed after early 2000 and lost their money and their trading careers.

The takeaway message is that successful traders are always students of markets, always learning, and always adapting. They have periods of feast and famine, and they learn to keep themselves afloat during the lean times so that they can participate when things get better. In that context, learning when to not trade is a crucial component of trading success.

Hope this help and please do leave some comments to let me know what you think

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It is time for another guide in trading So for all of you who are new or unfamiliar with trading world, the key of trading is actually the management of risks. In the trading world, you will be faced with many type of risks, which you have to manage.

Many folks always think trading only related to counting and numbers, however, there is one important risk that all of us must manage to achieve optimal result in trading. That risk is the psychological risk embedded in trading. In this post we will reveal four type of psychological risk in trading, and at the end of the post you can download and read the full explanation about psychological risk in trading

So let’s just start it, shall we? Here are the list of possible psychological risk you might find in stock trading (or many other kinds of trading):

• The risk of boredom – Many traders are attracted to trading because of the possibility of large P/L moves in a relatively short period of time.  Our sound trading method offers little such excitement.  Indeed, there are long periods of relatively flat performance.  If the trader is trading for needs other than profitability (excitement, quick riches), he or she is apt to abandon the method after months of treading water.
• The risk of drawdown – Many traders equate a trading edge with a smooth equity curve.  Not so!  As we mentioned in the earlier article, even a method with a 60/40 win/loss ratio will experience a series of four losing trades 2-3 times on average per 100 trades.  In the case of our random order of wins and losses, we wound up with months of drawdown, albeit modest.  The trader who equates drawdown with failure will abandon even a good method.
• The risk of drawup – We made up that term, in case you wondered, but you get the point.  If drawdown is the amount your portfolio loses value in a period of time, drawup is the amount your portfolio rises.  In a relatively short period, we had a series of winners early in the year, putting the portfolio up 20%.  A method with 60% winners has about a 13% chance of giving you streaks of four consecutive wins.  Why is this a risk?  After a big drawup, many traders become overconfident and change their position sizing and trading frequency, negating their edge.  Their expectations raised, they find it harder to get through the inevitable periods of flat performance.
• The risk of sequencing – Quite simply, even with a demonstrated edge and prudent loss limits, we cannot know in advance the sequencing of our winners and losers.  The account is up handsomely for the year, but spent just as much time treading water as rising.  Much of the method’s gains were obtained in a relatively short period of time–but we can’t know what that precise time is going to be. That means we have to endure down sequences and flat ones in order to get to the winning periods.

As promised, you can download the free managing psychological risk in trading e-book here

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