We all have heard about the importance of risk management and how crucial it is to our success.

However, nobody really talks about all the elements of the risk management. The most talked about risk management is market risk. Then credit risk. After that, you hear about counterparty and operational risks.

As a previous risk manager, I can tell you that all of these are important to your success. You need to look at your process and make sure that you have a great risk management system in place.

There is one element of risk management that is seldom talked about and often overlooked. This element can make or break your trading success.

Often, it is forgotten as part of the stress tests.

Have you guessed what it is?

If not, let me give you a hint. Depending on how you look at it, it can be consider part of counterparty or operational risk.

Some examples are as follows:

1. Do you have occasions when you know what to do but you don’t do it? Then you wonder what happened. You get angry and frustrated. You start losing money. If you don’t stop yourself, before you know it, you are in a deep hole.

2. Do you know of traders who have a system and know that their success is based on probabilities? However, they start picking and choosing which signal to pull the trigger on. Then they wonder why they are not making money consistently.

3. Have you ever put a trade on and immediately started doubting yourself? You move your stops, and you realize if you had just left it alone, you would be more profitable?

Have you figured it out yet?

If you have guessed that it is your mindset, you are correct.

All the above examples have one common thing – the human factor. Unless you have a completely automated system, you are the operator. Your results depend on you.

It does not matter what happens. It matters how you react to the event and where you put your focus on.

You can have the best systems in place. However, if you don’t develop your Mental Edge and are not in the zone, you are not going to execute your trades properly and thus you will lose a lot of money.

This element is so important that JP Morgan has a group called the 'Behavioral Finance Team' which deals with how mindset influences the execution of their trades.

Your action plan for designing your risk management system is:

1. Counterparty risk: Make sure your business plan matches who you are
2. Operational risk: Put yourself in a supportive environment
3. Counterparty and operational risks: Develop your Mental Edge

Risk management is vital. To ensure more successful execution of your trades and a consistent way of making money, make the above action plan part of your overall risk management system.

Here is to making trading success your habit™,

Following is the link to my interview with forextv.cm. I talk about:

1. 5 mistakes that can cost traders dearly
2. What is the missing element of risk management in today’s markets?
3. What can you do when markets do not behave as you expect?
4. What strategy can you use to handle market volatility?

Have you been in situations where you had several winning trades which were wiped out by one losing trade?

Have these become a pattern?

Like some of my clients, you may be saying, “I have spent hours creating my plan.” Then you start the day with every intention of following it. After a few losing trades, you lose your control and with that, your plans go out the window. You try to make up for your losses by chasing after deals and increasing the size of your trades. So you get in at the wrong entry point and the size does not warrant the risk.

The other scenario I have heard is that you have started the day by following your plan. You are making money. Then you feel that you are on a roll and you do not have to follow any plans. You know what to do and you go for a trade which was not on your plan, with bigger sizes than other ones. Then it happens. You wipe out all of your winnings.

You wonder what happened. “Where did I go wrong?”

You might start blaming your system. Therefore, you go from one system to another. With each system producing similar results, you get more and more frustrated and angry. Not only are you losing money on your trade, you are losing money and time on all the new systems that you are buying….

Next, you might say to yourself,” I do not know enough.” Therefore, you are buying one book after another. You attend one seminar after another to get more familiar with trading. Yet you are not seeing that much of a difference in your results. You are wondering what has happened. “Why am I not getting the results that I want?”

You might even think, “It is the type of security that I am trading. This is not the market for me.” So, you change markets. Yet you go through similar frustrations, headaches and results….

No matter what you do, your results are still not what you expect them to be. So, you might throw your hands up and not know what to do.

Any of these scenarios sound familiar? If so, you are not the only one. Lots of traders go through these.

The most successful traders know the secret. They know what it takes to be successful. They know that their secret to success lies in their mindset. It is the mental edge that they develop which separates them from the rest of the traders.

So what are 7 steps that you can take when your trades go against you?

1. When the trade goes against you, get out of the trade — Do not move your stops.
2. Clear your mind before doing another trade. Then you are not reacting to your loss. You can concentrate and find the right trade for you.
3. Look at each trade individually. By doing this, you are not influenced by the result of previous trades and are not taking unwarranted risk. Hence, when you are up, you are not risking all of your wins. Similarly, when you are down, you are not increasing the size of your trade to make up for what you have lost.
4. Have a Trading budget and stick to it. Only invest the amount that you can lose.
5. Think about trading as a game similar to Monopoly. As you know, each game has its rules and as you become more experienced in it and become more comfortable with the rules, it becomes more fun….
6. Stick to your plan — One of the best ways that I have heard someone defining trading is: “Trading is simple, but not easy. And the greatest difficulty is to accept the simple rules and obey them with discipline.”
7. Remember, it is a process — You have to stick to your plan for a while, before jumping from one thing to another. As Michael Jordan says:

“I have missed more than 9,000 shots in my career. I have lost almost 300 games. On 26 occasions, I have been entrusted to take the game-winning shot…and I missed. I have failed over and over and over again in my life. And that’s precisely why I succeed.”

By following these simple steps, your career as a trader will become more effective, more rewarding and ultimately more successful.

Remember: Perseverance is key! Like Albert Einstein said:

“It’s not that I’m so smart, it’s just that I stay with problems longer.”
To Making Success Your Habit™,

With today’s market, how are you handling your trading?

The uncertainty is uncomfortable.

Some feel that the devil they know is better than the one they don’t know.

What are your options in these markets?

1.     Know your Personal Risk Profile (PRP) 

This is about knowing who you are and how you react under different market conditions. It is about finding out if your PRP matches the strategies that you have in place.

2.     Lessen your Input

These days, everybody is talking about the markets and how it is impacting their lives. Limit the amount of your conversations and filter the information you are hearing or reading.

There is a quote by Warren Buffett that “A public-opinion poll is no substitute for thought.” 

3.     Manage your Expectation

Frustration comes when we have unmet expectations. We assume that we should have a crystal ball and know what is going to happen. Worse, we think, “How come markets do these things to us?”

The truth of the matter is that the markets are neutral and they do not care. It is about us and what our expectations of the markets are.

Epictetus has a saying: “We are not troubled by things themselves, but by our thoughts about them.”

4.     Be Flexible

When you notice the market changes, ask yourself if the assumptions that you entered the trade, are still valid. If they aren’t, then get out of the trade. 

When you do, you give yourself a chance to think clearly and come from a more objective place.

James Dean says, “I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.”

5.     Manage your Energy

Where is your focus? Are you focusing on the challenges or on the solutions? Do the activities that you are involved in energize you or drain you?

Who are the people around you? Do you feel more inspired or discouraged after spending time with them?

If you don’t mange your energy and set boundaries, others will do it for you.

Charles Darwin says, “It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.”

Here is to making trading success your habit™,

How many times have you heard that one of the keys to trading success is consistency?

Probably too many times. Well, it is true.

How do you define trading consistency? What are the elements of it?

I have come up with the five C’s of trading consistency, which are:

1.     Clarity

The first C of trading consistency is clarity. This is one of the most important elements.

When we are not clear about why we are trading and our trading plan, we jump from one thing to another. Our actions are not focused. As a result, things take longer and we do not produce consistent profits.

With clarity comes focus. When we have focus, we have more profitable trades.

2.     Commitment

The second C of trading consistency is commitment. I know this is stating the obvious. Find out how committed you are by answering the following questions.

When you are trading:

• What are you willing to do?
• What are you willing to give up?
• What do you do when things are not comfortable?
• What do you do when things are not convenient?
• What boundaries are you willing to set?

3.     Courage

The third C of trading consistency is courage. Let me ask you a question. Have you had occasions that you know what you need to do and yet you don’t do it?

The action might not be comfortable for you, or it might not be at the right time. Do you have the courage to take the action anyway?

This is where clarity comes into place. Knowing why you are doing something allows you to handle challenges that come in your way.

When I talk to some traders, they tell me because of lack of capital, they do not follow all the signals that their system gives them. They start picking and choosing. Then they have more losses than they care to. Then they lose more capital and this vicious cycle continues.

4.     Confidence

The fourth C of trading consistency is confidence. You might know what to do and you don’t have the confidence to take the action. You might not believe that you can do it.

This is where courage comes into place. There are times that you might not fully believe you can do it.  At these times, when you have courage to take action, you are one step closer to getting the results that you want.

By not taking action, you are guaranteed of not getting any results, both positive and negative.

I remember meeting a person who wanted to trade. However, he was afraid of losing even a penny. In addition, his wife was scared of losing money. As a result, after studying trading for over a year and a half he had not pulled the trigger yet.

A lot of times, we do not want to fail. So we do not take any action!!!

5.     Calmness

The fifth C of trading consistency is calmness.

How do you handle adversity? What do you do when the markets go against you? Do you get angry and defensive or do you stay calm and play offensive?

When the markets go against you, do you overtrade? Do you try to make all of your losses in one deal? Or do you stay calm, take a breather and reevaluate the market?

When our emotions go up, our intelligence comes down. We make bad decisions. We take it personally. Then we start doubting ourselves and we start losing confidence. Then we start losing more and more…

When we stay calm, we can evaluate the market from an objective place. We can see the market for what it is and not what we want it to be. Then we can take a calculated risk.

Consistency is most difficult and most readily proven during tough times. How someone weathers the storms demonstrates their skills.

Here is to making trading success your habit™,

Trading is about probability and not control. However, most people want to control the outcome.

Don’t get me wrong, when we trade, we trade with the intention of winning. However, when you realize it is about probability and nothing is guaranteed, then it is easier to detach yourself from the results and be free to notice how the market is behaving and adjust your positions accordingly.

I don’t know if you have seen the movie “Kung Fu Panda” or not. In any case, this reminds me of the following conversation:

When you are not under the illusion of control, you are in the zone and you can be in flow with the markets and get the results that best suit you.

Here is to making success your habit….

Do you know people who have made lots of money and then they go into losing streaks?

Do you know them intimately?

What happens is that you start making money and you are happy and confident. Then you believe you can do it your way and start changing things and throwing away your rules that helped you to make money consistently.

You try to take one shortcut after another. After all, you have made the money. So you don’t need to follow your own rules. Then you start losing money, and before you know it, you are in the hole…

Does this sound familiar?

I have heard versions of this story over and over again. The reasons vary. One reason is that people get bored and they want more excitement. Another is that they want to beat the system. No matter what, the results are the same.

What can you do about it? 

1. If you want to change things around, change ONLY one thing at a time and test it. 
2. Don’t ignore your rules.
3. Ask yourself is it more important to make money or be right?

 Here is to making success your habit….

Have you told yourself, “I know exactly what is wrong and how to fix it, but I can’t?”

Have you ever blamed yourself for not having enough discipline to follow your plans?

 If so, you are not alone. People think that if you don’t have self-discipline, you don’t have control. They forget about the fear that creeps in.

What differentiates the traders who make money in the volatile markets from the other traders? The difference is that they recognize their fears and are willing to do what most traders won’t.

You might have heard that Courage is not the lack of fear. It is acting in spite of it.

So what can you do to prevent this? 

1. Realize that it is not about you.
2. Take your emotions out of your trading.
3. Look at your portfolio objectively.
4. Do not fight the market and work with it.

Here is to making success your habit….

Have you ever been excited to start something and then after a while you stopped?

Have you had problem motivating yourself after some obstacles?

It is normal to feel disappointed when we face challenges. How we react to the disappointments determines our successes and failures.

Jim Rohn has a saying: “Motivation is what gets you started. Habit is what keeps you going.”

What are habits? They are the behaviors that we do over and over. For instance, have you ever noticed that when you are driving somewhere, you don’t know how you got there?

How can you develop better habits?

Notice your daily routines and ask yourself, are they supporting you or hindering your success?

If they are not contributing to your success, change them with the ones that do.

Here is to making success your habit….

If you say, what little voice? that is the one.

Have you noticed that when you want to do things, there is a voice of fear that wants you to stop doing what you want?

Then there is another one that tells you it is OK to go ahead and do what you want to do.

Which one do you normally listen to?

Both voices have their valid places. The fear stops you from hurting yourself. However, is it stopping you from achieving your highest potential?

I was attending a seminar and one of the speakers was talking about the ‘Latte Effect’. She mentioned that she was tired of people saying, don’t buy your Latte and save the money. She said a better question is, what can I do to afford the Latte?

What does this have to do with trading?

If you concentrate on your losses, then you are decreasing the probability of your wins on the next trade.

However, when you focus on the potentials, you are increasing the probabilities of your wins!!!

Here is to making success your habit….