Monday, May 12, 2014

The Role of a Trader

The role of a trader can be reduced to two basic tasks:

1) Manage risk
2) Earn a return

First and foremost, a trader must protect precious capital.  A trader accomplishes this several ways.  First, a trader must know when she or he is "wrong".  In other words, prior to entering a trade, one must decide beforehand where to exit the market in the event of adverse price movement.  Secondly, a trader must establish a criteria for "slowing down".  After a string of losses, no matter how small, one should seriously consider verifying that he or she is trading according to the plan.

It is only after managing risk that a trader is able to focus on earning a return.  The allure of the markets is deceptive.  Many flock to trading seeking profit, but the vast majority of individuals fail.  In my opinion, the primary reason for this failure is a lack of proper risk management and an inability to plan and reassess one's edge.

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