Why Do Traders Make Mistake "Failure to Control Risk"? 

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Why Do Traders Make Mistake "Failure to Control Risk"?



The sad fact of the matter is that the majority of traders don't get around to addressing money management issues until after they have suffered an unexpectedly large decline in equity.

Part of the reason for this is that when a trader starts a new trading program his primary focus is the upside potential and not the downside risk. Very few people get into futures trading simply to diversify their investments. And almost no one gets into futures trading hoping to generate an 8% average annual return. The only reason to venture into something as risky as futures trading is to earn above average rates of return (You don't see people getting into Indy race cars to drive to the corner market. The only reason to drive one is to go fast). Unfortunately, because so many traders are focused on the "upside potential" there is a dangerous tendency to either ignore or at least downplay the downside risk. In essence, too many traders "want to believe" that they will be successful or they buy into the idea that futures trading can generate "easy money." These are extremely dangerous notions.

In reality, most traders would benefit from "fearing" the markets more than they presently do. A fear of losing a large chunk of money quickly is what causes traders to keep their guard up. A lack of fear is what gets them into trouble. In almost every other endeavor we are taught to "fight, fight, fight" and that if we persevere and stick to it we will win in the end. In futures trading these notions are completely wrong. If you start losing a battle in the futures markets your best bet is usually to turn tail and run for cover. Unfortunately, because this kind of thinking runs counter to the way most of us have been taught to think, many traders focus on "fighting the good fight" rather than on cutting losses.

It sounds obvious, but it is important to remind yourself that once you lose all of your trading capital that's it — you are done trading futures. Your very first priority as a trader is to always do whatever you have to do in order to be able to trade again tomorrow. Anyone who trades long enough will score some big winning trades and/or enjoy some sustained winning periods. The trick is to stick around long enough to experience these trades and to minimize your losses in the meantime so that the big winning trades or winning streaks actually put you well into the black. In the final analysis, proper risk control is the key determinant in separating the winners from the losers in futures trading.





Categories in Trading Mistakes

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Using too much Leverage
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Failure to control Risk
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Lack of Discipline
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Useful Advices to Beginning Trader
You can control your success or failure

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