Sorry in advance if this sounds like I’m ranting, which I guess I sort of am.
As I’m sure you often do as well, I frequently hear bold calls and predictions on the financial blogosphere and Financial Media Entertainment Complex (cc @mikebellafiore) about individual stocks, the general market indices, commodities, etc. You hear things like “this is the bottom in oil” or how “the S&P 500 could fall another ten percent” or how “the market will force the Fed’s hand to cut rates” or about how “gold has officially bottomed” or whatever it may be. These predictions are often professed with such a sense of certainty that you would think they are just bound to happen.
Rarely is risk management ever introduced into the conversation. This is such a huge disservice. Capital preservation and playing defense is job number one, as @alphatrends always says. I do not have a problem admitting that I have no idea what will happen in the market, and neither should you.
Sure, I may have certain scenarios in mind and ponder each of their probabilities, but I am only willing to commit capital when I strongly believe that I am entering a high probability trade with a solid risk-reward. I’m not going to just pay the offer and get long oil because I came up with the notion that it has bottomed for whatever reason. I’m not going to hit the bid and get short gold because I think it’s up too much. While these ideas may be valid (albeit superficial in reasoning), they offer very little in terms of execution. There is no consideration of risk management (stop placement, price action, risk-reward, etc.).
Being a successful trader isn’t about making bold predictions. It’s about preparing each morning for the opportunities and setups that may present themselves throughout the day. It’s about focusing on the trades where you have an edge. It’s about setting alerts at important levels. It’s about connecting with other traders for additional idea generation. It’s about setting stop-loss levels. It’s about hitting out of trades that go against your predefined stop. It’s about sitting at your desk and chugging along during busy market days. It’s about journalizing and reviewing your trades made throughout the day and learning from your successes and failures. This list isn’t meant to be exhaustive.
The morale of the story is this: I’m not in the professional prognostication business, despite its ubiquity in the finance world. I don’t make predictions. I find high probability setups with low risk and potentially high reward, and I execute (I’m sure this is a bit of an oversimplification). Ideas are great, but without considering even basic risk management principles, these calls are worthless.
Thanks for reading. Please let me know if you have any questions or comments.