September 17, 2007 at 10:36 am | | Comments 4

Satisfy Your Craving For Risk

Most traders at least occasionally have to deal with the urge….the temptation….the allure of taking on more risk. Sound familiar?

Risk’s Widespread Appeal

I’ve had the good fortune of spending time and trading with quite a few traders of all types. Some trade stocks, others trade futures or options. Some of them are day trading, others are swing trading. Some of them trade part time, others trade full time. But regardless of the characteristics which define their approach, every last one of them has at some point felt this urge of which I speak.

Oh there have been some great stories along the way of big wins and losses, but every single memorable story involves risk. Great days and even downright pathetic days will all boil down to how much risk is taken, and how well it is managed. If you stop to think about it, we’re all quite lucky to have the ability to make this choice every day. Those who become highly skilled in the balancing act of taking and managing risk effectively become successful traders. Those who do not will quickly become a mere statistic.

Gambles Must Be Small

I’ll venture to say that all great traders have a respect for risk in the markets they trade, and as a result they all have a certain level of discipline which goes along with it. I’ve commented to people before when asked if day trading is a high-risk endeavor that “it could be your own little Las Vegas every day of the week if you want it to be” but that taking that path almost guarantees a brief career as a trader. Personally, I don’t want a real job!

But what if you love to take occasional risks? Can you still be a great trader? What if you just have that urge to swing for the fence sometimes? Well, I’m here to tell you that it can hurt you, unless you do it the right way.

Taking high-risk trades doesn’t have to mean the kinds of gambles which get amateur traders into trouble. Stubbornness and speculation are not the same thing. The trader who blows out his account after adding repeatedly to a losing position is very different from the trader who puts on a small position as a hunch, risking a limited amount and never putting his trading livelihood on the line. Buying a lotto ticket isn’t the same as putting your car keys into a Friday night poker pot! Rolling the dice is alright on occasion, so long as the consequences aren’t significant enough to cause any real damage.

Some traders might want to buy a small amount of a high-flyer, trade some out-of-the-money options, or dabble in some illiquid little stock while waiting for an anticipated story to play out. Maybe you can’t fight the urge to take a few shares of a stock into earnings, or to try to game a Fed move after the announcement, both of which are a complete coin-toss. Perhaps you’re able to do this right alongside your normal positions and never let these little speculations interfere with your day-to-day operations, but if you’re like me, you find them somewhat distracting as your attention moves from what you should be watching to these little speculative trades like horses in a race.

The Solution for Speculators

Never fear, there is a solution: trade multiple accounts! I’ve found this to be the ideal way to separate different types of trades, allowing me to satisfy that occasional urge to take a risk while still keeping my attention where it needs to be – on my primary trading account.

Funding a speculative or secondary account with only a fraction of what your primary trading account is funded with will keep any profits or losses at a minimum, because remember, profits isn’t the point of a secondary spec account. This account exists solely to let you trade the high-risk plays in order to scratch that itch for an occasional home-run-or-strikeout type of play. The aim of this account is to let you act on those urges without the consequences if you’re wrong. After all, these are the kinds of plays which could really wreck your main account, so keeping them separate and tiny lets you focus on what matters most – pulling consistent gains out of the market in a more methodical way than going for the long ball.

These secondary accounts can also be used to hide longer-term plays from plain view, which will come in handy on occasion. What happens if you’re short-term bearish but have some long-sided positions socked away for the long term? It’s easy under the gun to lump everything together, but separating your timeframes across accounts can be an effective way to trade both timeframes according to your plan. Secondary or spec accounts also effectively hide the number while letting your higher-risk plays fully develop.

If you haven’t considered having a primary trading account and at least one smaller trading account to satisfy your urge for that occasional added risk you love to take, give it a shot and you’ll quickly see the benefits. Have the discipline to set one up. If anything, it’ll keep your pain to a minimum when you swing for the fence and miss, while keeping you focused on the types of trades which really pay the bills.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]

RSSComments: 2  |  Post a Comment  |  Trackback URL

  1. So, what about this trade: buying 40,000 of yahoo on the reason it has a great MACD bullish crossover, good volume, very positive charting which avoids bearish downturns when the overall market is doing so, the other technicals I like are all looking positive…. but with only 27,000 in equity in my account, it would look like a normal day is a 0.5 cents of volatility so it’s about 800 dollars a day of volatility which can be eaten/given up. Is this stubbornness or speculation? I’ve looked at this thing, and I think it’ll work, and it’s different from trying to catch an upswing and sell inside the hour, this is trying to ride out some lows during the day and hold it for a market day and see what happens ….

  2. Joe,

    That’s something only you could answer. Everyone has a different tolelrance for risk, so for you $800 may be different than for the next guy. I’d just say don’t ever put your account at too much risk, so when trading on margin be sure you have a hard stop in place.

    As for whether it’s speculation, the point of this article is addressing the “hunch” trades which aren’t based on your trading rules, whatever those may be. When you have an itch to take a trade which doesn’t fit your normal trade criteria, those are the trades I’m referring to taking in a smaller ‘spec’ account.

    Hope this helps & trade well!


Trackbacks: 2  |  Trackback URL

  1. From Earnings Are Tricky | on Oct 18, 2007
  2. From 4 Trading Goals You Can Set Right Now | on Oct 14, 2008

Sorry, comments for this entry are closed at this time.