đź“ŚWHY RISK MANAGMENTâť“âť—đź“›
âś…Traders heard to consider risk management but aren't given good enough reasons for this risk management rule. We'll explain the the psychology and biology behind our frenzy of buying any stuff in bullish market or depression after our thoughtless, recklessness decisions ...
⚪⚫🔴🔵
🆗Anyone who has taken a risk understands its visceral feeling. Dr. John Coates puts it beautifully, “Risk engages our entire being,” and his book The Hour Between Dog and Wolf: Risk Taking, Gut Feelings, and the Biology of Boom and Bust explores how risky wins and losses can change us “Jekyll-and-Hyde-like beyond all recognition.”
Running the derivatives trading desk for Goldman Sachs and later Deutsche Bank in New York, Dr. Coates witnessed first-hand this biology of risk-taking and its effects in the financial markets. During the dot-com bubble and bust, he observed cocky and unreasonable behavior when traders were on a winning streak, and the extreme opposite after huge losses.
Looking to bring biology to the story of overconfidence and irrationality in our financial market instability, he retired from Wall Street and returned to the University of Cambridge in 2004 to study neuroscience and endocrinology, in order to understand how risk-taking affects our bodies.
Dr. Coates’ research found that hormones are at work during risk-taking: testosterone is likely to rise in a bull market, while cortisol is likely to rise in a bear market. Moreover, these hormones and signals from the body not only influence risk-taking among financial traders, but they also have wider implications beyond the markets.
In the John Coates Book, That winning feeling
The ancient Greeks believed that we were visited by gods during defining moments in our lives, such as winning battles, love, and childbearing. Those instants felt extra vivid and powerful, but Dr. Coates discovered that these feelings are really induced by our hormones, not Olympian gods.
Testosterone fuels the “winner effect.” It affects the brain, increasing confidence and appetite for risk, but after an extended winning streak, testosterone also causes overconfidence, unreasonable exuberance, and obliviousness to danger.
🔸🔹🔶🔷◾
âś…SO doing the Risk Management Techniques for Active Traders is vital :
0)Planning Your Trades
"Every battle is won before it is fought." This phrase implies that planning and strategy—not the battles—win wars.
successful traders commonly quote the phrase: "Plan the trade and trade the plan." Just like in war, planning ahead can often mean the difference between success and failure.
⬛1)Consider the One-Percent or 2% Rule
Although this rule mostly depends on your trading strategy and your market ,but this rule of thumb suggests that you should never put more than 1% of your capital or your trading account into a single trade. This strategy is common for traders who have accounts of less than $100,000—some even go as high as 2% or even more if they can afford it.
⬜2)Setting Stop-Loss and Take-Profit Points
The points are designed to prevent the "it will come back" mentality and limit losses before they escalate. For example, if a stock breaks below a key support level, traders often sell as soon as possible.
On the other hand, a take-profit point is the price at which a trader will sell a stock and take a profit on the trade. This is when the additional upside is limited given the risks.
⬛3)buying or selling in several steps
this rule also called "averaging down or up". In this case assume you aim to invest in an asset but haven't any accurate strategy to determine a good entry point an exit , but you know the general trend of a market , and by allocation of your fund in different steps you can lower your risk of buying or selling , for example you want to buy bitcoin but you haven't any specific strategy so by regarding of your capital you can buy it after any drop or regular period of time for instance at each month.
⬜4)Diversify and Hedge
Making sure you make the most of your trading means never putting your eggs in one basket. Whatever your asset is your challenge is to pick If you put all your money in one stock or one kind of an asset , you're setting yourself up for a big loss. So remember to diversify your investments—across both industry sector as well as market capitalization and geographic region. Not only does this help you manage your risk, but it also opens you up to more opportunities.
⬛5)Downside Put Options
If you are approved for options trading, buying a downside put option, sometimes known as a protective put, can also be used as a hedge to stem losses from a trade that turns sour. A put option gives you the right, but not the obligation, to sell the underlying stock at a specified priced at or before the option expires
⚪⚫🔴🔵
🆗Anyone who has taken a risk understands its visceral feeling. Dr. John Coates puts it beautifully, “Risk engages our entire being,” and his book The Hour Between Dog and Wolf: Risk Taking, Gut Feelings, and the Biology of Boom and Bust explores how risky wins and losses can change us “Jekyll-and-Hyde-like beyond all recognition.”
Running the derivatives trading desk for Goldman Sachs and later Deutsche Bank in New York, Dr. Coates witnessed first-hand this biology of risk-taking and its effects in the financial markets. During the dot-com bubble and bust, he observed cocky and unreasonable behavior when traders were on a winning streak, and the extreme opposite after huge losses.
Looking to bring biology to the story of overconfidence and irrationality in our financial market instability, he retired from Wall Street and returned to the University of Cambridge in 2004 to study neuroscience and endocrinology, in order to understand how risk-taking affects our bodies.
Dr. Coates’ research found that hormones are at work during risk-taking: testosterone is likely to rise in a bull market, while cortisol is likely to rise in a bear market. Moreover, these hormones and signals from the body not only influence risk-taking among financial traders, but they also have wider implications beyond the markets.
In the John Coates Book, That winning feeling
The ancient Greeks believed that we were visited by gods during defining moments in our lives, such as winning battles, love, and childbearing. Those instants felt extra vivid and powerful, but Dr. Coates discovered that these feelings are really induced by our hormones, not Olympian gods.
Testosterone fuels the “winner effect.” It affects the brain, increasing confidence and appetite for risk, but after an extended winning streak, testosterone also causes overconfidence, unreasonable exuberance, and obliviousness to danger.
🔸🔹🔶🔷◾
âś…SO doing the Risk Management Techniques for Active Traders is vital :
0)Planning Your Trades
"Every battle is won before it is fought." This phrase implies that planning and strategy—not the battles—win wars.
successful traders commonly quote the phrase: "Plan the trade and trade the plan." Just like in war, planning ahead can often mean the difference between success and failure.
⬛1)Consider the One-Percent or 2% Rule
Although this rule mostly depends on your trading strategy and your market ,but this rule of thumb suggests that you should never put more than 1% of your capital or your trading account into a single trade. This strategy is common for traders who have accounts of less than $100,000—some even go as high as 2% or even more if they can afford it.
⬜2)Setting Stop-Loss and Take-Profit Points
The points are designed to prevent the "it will come back" mentality and limit losses before they escalate. For example, if a stock breaks below a key support level, traders often sell as soon as possible.
On the other hand, a take-profit point is the price at which a trader will sell a stock and take a profit on the trade. This is when the additional upside is limited given the risks.
⬛3)buying or selling in several steps
this rule also called "averaging down or up". In this case assume you aim to invest in an asset but haven't any accurate strategy to determine a good entry point an exit , but you know the general trend of a market , and by allocation of your fund in different steps you can lower your risk of buying or selling , for example you want to buy bitcoin but you haven't any specific strategy so by regarding of your capital you can buy it after any drop or regular period of time for instance at each month.
⬜4)Diversify and Hedge
Making sure you make the most of your trading means never putting your eggs in one basket. Whatever your asset is your challenge is to pick If you put all your money in one stock or one kind of an asset , you're setting yourself up for a big loss. So remember to diversify your investments—across both industry sector as well as market capitalization and geographic region. Not only does this help you manage your risk, but it also opens you up to more opportunities.
⬛5)Downside Put Options
If you are approved for options trading, buying a downside put option, sometimes known as a protective put, can also be used as a hedge to stem losses from a trade that turns sour. A put option gives you the right, but not the obligation, to sell the underlying stock at a specified priced at or before the option expires
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