7 Rules for dealing with Risk:
2. Remain Flexible: Surprise outcomes may require a change of plan.
3. Take reasoned risks: Risk can be good if the odds are in your favor.
4. Prepare to be wrong: Plan in advance how to deal with unfavorable outcomes.
5. Actively seek reality: See the world as it is rather than as you want it to be.
6. Respond quickly to change: If your plan calls for some action in the face of unfavorable outcomes, don’t delay.
7. Focus on decisions, not outcomes: In the face of risk, good choices can have bad outcomes, and bad choices can have good outcomes.
Three Reasons Why Most Trading Strategies Fail
Wonder how would you rank order market selection, setup/entry timing, protective stop, trailing stops/exit and position sizing in terms of overall importance to the success of a trading system?
A: Each are important, but in analyzing numerous strategies I have not seen a tried-and-true ranking system that fits everything.
The reason I think (and my research proves out) that why strategies fail are directly related to three main things:
1) User error (i.e. failure to act on the signals provided by your system in a consistent manner without trying to outsmart the system.)
2) Over optimization and use of extensive leverage.
3) The most important of all – little to no risk management through proper position sizing and stops. All in all, if you really are focused on improving yourself in 2010, the first place to look is risk management as it has more of an impact over your eventual success or failure than anything else.
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