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Money Management, Part 2
By Joe Ross


FEARING LOSSES

There is a huge difference between being risk averse and fearing losses. You must hate to lose. In fact, you can program your brain to find ways to not lose. But not losing is a logical thought-out process, rather than an emotion-based reaction.

Two human-based tendencies come into play. The first is the sunk-cost fallacy and the second is the exaggerated-loss syndrome.

Sunk-cost fallacy: You are in a trade that begins to go against you. You reason that you have already spent a commission, so you have costs to make up for. Moreover, you have spent time and effort researching and planning this trade. You reckon that time and effort as cost. You have waited for just such an opportunity and you are afraid that now that it has come you will have to miss this trade. The time spent waiting for opportunity is something you also count as cost. You don`t want to waste all these costs, so you decide to give the trade a little more room. By the time you realize what you?ve done, the pain is almost overwhelming. Finally, you have to take your loss which is now much larger than it might have been. The size of the loss adds to your fear of ever losing again. The end result is brain lock and inability to pull the trigger on a trade.

Exaggerated-loss syndrome: You give the importance of losing on a trade two to three times the weight of winning on a trade. In your mind, losses have greater significance than wins. In reality, neither is more or less important than the other. In fact, wins do not have to be as numerous as losses as long as the wins are significantly larger in size than the losses. Of course, best is to have more wins than losses with the wins greater in size than the losses. What should be done?

Evaluate your trades solely on their potential for future loss or gain. Ask yourself, ?what do I stand to gain from this trade, and what do I stand to lose from this trade?? Think the matter through. ?What is the worst thing that can happen to me if I take this trade, and do I have a plan and a strategy for extricating myself long before it happens?? ?If I begin to lose, is there a way I can turn things around and come out a winner?? Learn to look at the costs of a trade as part of your business overhead. Try to have a mind set that you will not throw good money after bad. When you give a trade more room, you are doing just that ? often throwing away money.

VALUING INVESTED MONEY MORE THAN WON MONEY

Traders have a tendency to be more careless with money they?ve won than with money they?ve invested. Just because you won money on good trades doesn?t mean you should gamble with that money. People are more willing to take chances with money they perceive as winnings as though it were found money. They forget that money is money. Valuing money depending on where it comes from can lead to unfortunate consequences for a trader. The tendency to take greater risk with money made from trades than with money invested as capital makes no sense. Yet traders will take risks with money won in the markets that they would never dream about with money from their savings account.

What should be done?

Wait awhile before placing at risk money won on trades. Keep your trading account at a constant level. Strip your winnings from your account and put them in a safe conservative place. The longer you hold on to money, the more likely you are to consider it your own.

FORGETTING ABOUT MARGIN INFLATION

Before the crash of 1987, S&P 500 stock index futures carried an exchange minimum margin of about $12,000 . Immediately after the crash, margins required by some brokers rose to $36,000 and higher.

A trader we know, called Willie, figured that if prices on an index he was short went down, he would continually add to his position whenever prices first pulled back and then broke out to new lows. The index he was trading became very volatile, and his broker raised margins to by 1/3rd. Willie was trading a small account, and when he tried to sell short additional contracts onto his already short position, his broker would not allow him to do so. Willie complained bitterly, but the broker was adamant in his refusal. The broker would not allow Willie to use unrealized paper profits to cover the additional margin required for adding on. He explained to Willie that to do so would in effect allow Willie to build a pyramid position and that was not going to be allowed by the broker`s firm.

The mistake Willie was making was what some call the ?money illusion.? Willie assumed that because his position was moving in his favor that he had more selling power and more margin. His broker quickly brought Willie face to face with reality. While some brokers may allow it, unrealized paper profits do not truly constitute additional funds that may be used for margin. Willie?s dream of fabulous profits from this trade were just that, a dream. Willie should be thankful that his broker did not allow him to get in trouble. Pyramiding with unearned paper profits is not the way to succeed as a futures trader.

What should be done?

You should realize that each so-called ?add-on? to an open position is really a whole new position. Each add-on carries all new risk, and each add-on brings you closer to the add-on trade which will fail and become a loser. When planning a trade, be aware that if the market becomes volatile, margin requirements may go up, thereby defeating any strategy for adding on to your position. There is nothing wrong with building a position one leg at time as prices ascend or descend, but when volatility dictates an increase in margin requirements, beware of trying to add on and be aware that you may not be able to add on.

Option sellers can quickly get into similarly difficult positions. As they roll out to new strikes to defend a threatened short options position, they can find themselves not only facing the need for a larger position, but also facing increased margins in creating that larger position. They may discover that they no longer have sufficient margin to defend a particular position and thus have to eat a sizable loss.

MORE KEY MISTAKES

Throughout our courses we mention some key mistakes commonly made by traders. Here are a few more:

Error: Confusing trading with investing. Many traders justify taking trades because they think they have to keep their money working. While this may be true of money with which you invest, it is not at all true concerning money with which you speculate. Unless you own the underlying commodity, for instance, selling short is speculation, and speculation is not investment. Although it is possible, you generally do not invest in futures. A trader does not have to be concerned with making his money work for him. A trader?s concern is making a wise and timely speculation, keeping his losses small by being quick to get out, and maximizing profits by not staying in too long, i.e., to a point where he is giving back more than a small percent of what he has already gained.

Error: Copying other people?s trading strategies. A floor trader I know tells about the time he tried to copy the actions of one of the bigger, more experienced floor traders. While the floor trader won, my friend lost. Trading copycats rarely come out ahead. You may have a different set of goals than the person you are copying. You may not be able to mentally or emotionally tolerate the losses his strategy will encounter. You may not have the depth of trading capital the person you are copying has. This is why following a futures trading (not investing) advisory while at the same time not using your own good judgment seldom works in the long run. Some of the best traders have had advisories, but their subscribers usually fail. Trading futures is so personalized that it is almost impossible for two people to trade the same way.

Error: Ignoring the downside of a trade. Most traders, when entering a trade, look only at the money they think they will make by taking the trade. They rarely consider that the trade may go against them and that they could lose. The reality is that whenever someone buys a futures contract, someone else is selling that same futures contract. The buyer is convinced that the market will go up. The seller is convinced that the market has finished going up. If you look at your trades that way, you will become a more conservative and realistic trader. Error: Expecting each trade to be the one that will make you rich. When we tell people that trading is speculative, they argue that they must trade because the next trade they take may be the one that will make them a ton of money. What people forget is that to be a winner, you can`t wait for the big trade that comes along every now and then to make you rich. Even when it does come along, there is no guarantee that you will be in that particular trade. You will earn more and be able to keep more if you trade with objectives and are satisfied with regular small to medium size wins. A trader makes his money by getting his share of the day-to-day price action of the markets. That doesn`t mean you have to trade every day. It means that when you do trade, be quick to get out if the trade doesn?t go your way within a period of time that you set beforehand. If the trade does go your way, protect it with a stop and hang on for the ride.

Error: Having profit expectations that are too high. The greatest disappointments come when expectations are unrealistically high. Many traders get into trouble by anticipating greater than reasonable profits from their trading. They will often get into a trade and, when it goes their way and they are winning, they will mentally start spending their winnings, and may even borrow against their anticipated winnings to take on additional risk. Reality is that you seldom make all of the money available in a trade. I cannot count the times that I had for the taking hundreds or thousands of dollars in unrealized paper profits only to see most of those profits melt away before I was able to or had the good sense to get out. One trader I know had $700 per contract profits in a short eurodollar trade. The next day his position literally imploded on news of a 50 basis point cut in interest rates. He was lucky to get out with $350 per contract. The money from trading often doesn?t come in as fast or as plentifully as you have expected or been led to believe, but the overhead costs of trading arrive right on schedule. False profit expectations have caused aspiring traders to leave their job before they were really successful. The same false hope causes them to lose the money of friends and family. False hope causes them to borrow against their home and other fixed assets. Too high expectations are dangerous to the well-being of every trader and those around him.

Error: Not reviewing your financial goals. Before you make a position trading decision, or before you begin a day of day trading, review your motives and your goals.

? Why are you trading today?

? Why are you taking this trade?

? How will it move your closer to your goals and objectives?

Error: Taking a trade because it seems like the right thing to do now. Some of the saddest calls we get come from traders who do not know how to manage a trade. By the time they call, they are deep in trouble. They have entered a trade because, in their opinion or someone else?s opinion, it was the right thing to do. They thought that following the dictates of opinion was shrewd. They haven?t planned the trade, and worse, they haven?t planned their actions in the event the trade went against them. Just because a market is hot and making a major move is no reason for you to enter a trade. Sometimes, when you don?t fully understand what is happening, the wisest choice is to do nothing at all. There will always be another trading opportunity. You do not have to trade.

Error: Taking too much risk. With all the warnings about risk contained in the forms with which you open your account, and with all the required warnings in books, magazines, and many other forms of literature you receive as a trader, why is it so hard to believe that trading carries with it a tremendous amount of risk? It?s as though you know on an intellectual basis that trading futures is risky, but you don?t really take it to heart and live it until you find yourself caught up in the sheer terror of a major losing trade. Greed drives traders to accept too much risk. They get into too many trades. They put their stop too far away. They trade with too little capital. We?re not advising you to avoid trading futures. What we?re saying is that you should embark on a sound, disciplined trading plan based on knowledge of the futures markets in which you trade, coupled with good common sense.

All the best in your trading,

Joe Ross
Trading Educators Inc

EzineArticles Expert Author Joe Ross
For more information about this article and/or the author visit http://tradingeducators.com/?source=Ezinearticles/

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...search the latest structured deposits for their clients. What would be the point in consulting an advisor if they failed to compare and contrast the deposits that should be suitable for their clients? The majority of advisors will use all of the information that is available to them at the present time and the clever ones will source their info free of charge. Services can be found that are run by IFAs for IFAs and the great news is; they are free from any kinds of costs. Once registered on the site in question IFAs can scour for structured deposits within the marketplace. The aim of the site is to promote the financial sector making it easier to understand. People can find the latest information relating to structured deposits on the site. It`s possible to stay bang up to date with the latest financial product...
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Precast Concrete - Precast Concrete
...nd for Precast Concrete on building sites around the country. Not only can building sites put Precast Concrete to good use though, other types of settings can create suitable storage solutions when these products are brought in to help. A number of Precast Concrete products can be made through specialist companies who work with their client`s right from the start to ensure they get the concrete products they require. Certain Precast Concrete products like retaining walls are perfect for both building and agricultural settings. On building sites the Precast Concrete walls can be used to hold soil and rocks back whilst farms can use such items as storage facilities for animal feeds and other grain related materials. Brick faced Precast Concrete can make a brilliant alternative to traditional bricks and mortar works on building sites. The beauty of this type o...
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The Taxation People - Article01.html
...ve paid too much tax! The Taxation People, are a forward thinking online accountancy service that specialise in helping people who might be eligible for a tax refund. They offer a online service, with a simple and easy to follow process that will get you the refund you are entitled to. I would urge you to check out The Taxation People, where if you have been or are currently employed The Taxation People can help you get a Tax Refund. The Taxation People are a trading name of Greer & Taylor LLP a respected and trusted accountancy service provider who offers a number of online services. Initially they are only offering the Tax Refund service that can be found at www.thetaxationpeople.com, but Greer & Taylor LLP are about to lauch a cost effective Self Assesment Service, keep an eye on www.greer-taylor.com for more in...
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Exhibition Stands - Exhibition Stands
...eds to be exhibited. An exhibition is more effective with Exhibition stands than without them. These stands come in all kinds of varieties with different designs, sizes, shapes and styles suitable for any size, kind and style of exhibition on any scale. It is utterly important for a client to understand, recognize and explain with clarity the exhibition stand requirements. According to these, service providers or product sellers are able to deliver the best suitable Exhibition stands. Since educational systems are also becoming more and more practical, and students need to exhibit their works of arts and sciences just like any other exhibition, many companies now are designing stands and supports for such requirements also, which mostly are smaller in sizes are also cheaper in price. Day by day people are getting busier and do not find time ...
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Fire Suppression - Fire Suppression
...s in its path. The bush fires in Australia claimed numerous lives recently and over in America, California has been plagued with a series of fires in the past. It`s always sad when you hear about lives being lost due to the ravages of fire, especially if precautions could have been taken to prevent lives from being wasted. Inside buildings fire suppression systems can be installed and they can stop fires and help to prevent potential injuries. Gas fire suppression systems are particularly effective and the agent used in these systems is a mixture of Nitrogen and Argon. The gas is stored at room temperature and when it is deployed it doesn`t produce any condensation. Fires are extinguished when this type of suppression system is used because the gases in the agent deplete the oxygen that i...
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Parking Permits - Parking Permits
...rking permitsthat enable them to park on company premises. In built-up areas parking can be a problem and pricey public car parks can be rather off-putting. They might be tempted to try their luck in private car parks that have lapse parking control measures. One way to ensure that the vehicles that are parked in car park have a legitimate right to be there is by issuing their owners with Parking permits. Self cling or adhesive versions are available and they have can have corporate logos printed upon them along with spaces for serial numbers, vehicle registration numbers, space numbers and issue dates. People might be allocated a certain space in the company car park that will tally with the number that is shown on their parking permit. Personnel can hold details about workers` vehicles to ensure that parking procedures are being...
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Presentation Binders - Presentation Binders
...ay grind of real life by watching a film, playing a computer game or drinking a bottle of wine with friends. Many people like me have a passion for writing; it is a way of expressing ourselves, passing the time and using our imagination. I have never considered having any of my work published, but I have used Presentation binders for the pieces of work that I am especially proud of. Presentation binders ensure that all the pages are held together in the correct order and I can keep them in an organised fashion rather than looking at them years later and becoming confused by the plot. Also wherever I store them due to the plastic covering they would be more likely to survive any damp that might occur. Obviously if I was going to send my work to a publisher if I used Presentation binders, they would be more likely to take my work seriously and there...
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Restaurant Menu Printing - Restaurant Menu Printing
...rely lunch in an Italian restaurant. I love it when you first sit down at the table and peruse the menu carefully. There`s an air of anticipation about what is to follow as you look forward to the meal. I think the look and layout of the menu is important, as is the choice of food that is on offer. I reckon that restaurants put a lot of thought into their Restaurant Menu Printing and employ the services of specialists in this field. With an attractive menu available to give out to the customers they will be able to pick a number of delicious dishes at their leisure. If the menu is lacking then they might decide to take their custom elsewhere. Businesses that provide a Restaurant Menu Printing service can provide menus for all types of establishments. They can keep Italian restaurants bus...
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Acrylic Cubes - Acrylic Cubes
...es are display cubes that showcase objects. Many retailers and shops can use Acrylic Cubes to display the products they sell. Acrylic Cubes are assembled using acrylic panels, and these panels are connected to each other using metal conductors. The acrylic panels are crystal clear and of high quality. They are also long lasting. Acrylic Cubes are also available in various sizes for customer specifications. We ensure that our Acrylic Cubes are durable and display an object in great style. We ensure customer satisfaction, and welcome our customers to have a look around. If you like what we have out here for you, go ahead and order your Acrylic Cubes today. ...
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Presentation Skills - Presentation Skills
...able to handle the pressure? Would you thrive in this scenario and put your presentation skills to the test, or would you much rather hide away at the back of the room? It can be a daunting proposition to get up and sell a new sales pitch in front of critical clients. They`ll be waiting to perplex you and use their specialist skills to question each detail, or fact that you provide them with. It certainly helps if you have received comprehensive sales training that includes presentation skills as one of the subject areas. Corporate training is big business these days and professional sales people need to be given skill sets that make them valuable assets to their company. Companies need to invest in the future of their sales teams and they can ensure they are equipped with all of the skills that they require by enlisting ...
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Vehicle Fire Suppression - Vehicle Fire Suppression
...pression system using monoammonium phosphate base-a dry chemical agent used to control most fires. This particular system is designed for large, off-road type construction and mining equipment for example; large excavators/shovels, draglines, haul trucks, wheeled loaders and even specialty vehicles such as slab carriers, tunnel boring machines, solid waste handling equipment and even forestry vehicles. These types of equipment and vehicles have large volumes of oils and hydraulic fluids under pressure so that is fire safety is of upmost importance. The above vehicle fire suppression System is a suppression system only and is not designed or intended to extinguish all fires. That is why it is very important that alternative fire fighting equipment is available in case the system does not totally extinguish a fire ...
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