22 October 2010
By : Chiang Kian Seng
“I heard from my friends that Forex trading is risky”
“Investing in stocks is risky, better to leave my money in fixed deposits”
“I know of someone that got burnt trading in the stock market, better not take the risk”
“Isn’t Forex trading riskier than trading stocks?”, etc.
These are some of the many comments and questions we often get from our students and members of the public who attend our free seminars. The word “risk” always seems to be mentioned in the same breath with the words “investing” or “trading”.
So, let us get a handle on this word, “Risk”. What does it really mean?
Looking up the word in a dictionary, “Risk” is generally defined with regards to investing as follows:
“The quantifiable likelihood of loss or less-than-expected returns”.
In most cases, people associate risk of investing with uncertainty and volatility of the instrument that they are trading or investing in. I think the keyword here is uncertainty. It is often the lack of knowledge and skill that makes trading and investing risky and not the instrument itself.
The Risk Is Not In The Car; It Is The Driver Behind The Wheel
Take driving a car as an example, the car being analogous to the trading or investing instrument. It would be a risky situation if a person decides to drive a car without having undergone any form of training. It is the person’s lack of knowledge and skill that makes the situation risky and not the car. Similarly, if someone wants to trade or invest in a particular instrument but has not undergone any form of training, this person would be assuming a higher risk, and it has nothing to do with the instrument.
To be a good investor and trader, one must first seek knowledge about the instrument that one is going to trade or invest in. It is similar to taking on a new job. First, you must learn what your new role is all about, what kind of tools are there to help you in your everyday routines, what are the skill sets needed to perform your new job properly, etc. After that, once you have acquired the knowledge and learnt the skills required, you still need a period of constant practice to apply your newly acquired knowledge and hone your new skills. It is only after having practised for a sustained period of time before one is able to get the “feel” of the job and perhaps do it with ease and confidence.
Risk Can Be Alleviated With Proper Education & Experience
This is the same process that you must commit to undertake when you decide to invest in any market. First and foremost, you must get yourself educated. It is strange that most parents would not think twice to pay high school fees to send their kids to university, when there is no real guarantee that they will succeed in life after getting their degree. However, when it comes to paying for financial education, where there is a chance they can lose all of the kids’ education funds, many people shy away because of the price. Instead, they would rather risk their hard earned money in a market or instrument that they have little knowledge of, or worse, investing based on rumours or tips from various unverified sources.
Most people are attracted by the myth of quick, easy money from investing or trading but fail to understand that it takes a lot of hard work to be successful. Everyone equates being a doctor or lawyer to earning lots of money. But it is also common understanding that to be a doctor or a lawyer requires one to put in many years of education and practice before one can be successful. Ask anyone about his or her current job and you would most likely get the same response that hard work is the norm. How then can it be different for investing and trading?
“Risk Comes From Not Knowing What You Are Doing” - the title of this article, is also a famous quote from arguably the most prolific investor in history, Warren Buffett. It sounds simplistic, but it epitomises the real meaning of the word “Risk”. Any instrument, be it stocks or forex will be dangerous if you don’t know what you are doing. It is not the instrument but the level of the investor’s understanding of the instrument and the market that determines his risk level. So, do yourself a favour, invest in your financial education before you invest in the markets. I leave you with another quote from Mr. Buffett: “The most important investment you can make is in yourself”.
Chiang Kian Seng, Trainer at FXDS Learning Group Pte Ltd, has more than 3000 hours of experience in trading and investing in Stocks, Forex and CFDs. To learn more about FXDS Learning Group and the financial education courses they offer, please go to www.fxdsgroup.com.
Showing posts with label RISK MANAGEMENT. Show all posts
Showing posts with label RISK MANAGEMENT. Show all posts
Friday, October 22, 2010
Wednesday, July 1, 2009
THE IMPORTANCE OF RISK MANAGEMENT
TEH HOOI LING EDITOR
PULSES JULY 2009
"THE DIFFERENCE between a good trader and a bad trader is risk management," says Victor Sperandeo, a veteran
Wall Street trader with more than 40 years' experience.
Indeed, for reckless traders, events of the past 18 months would have wiped them out completely with a slim chance of any comeback. Typically, in a bull market, investors don't worry too much about risk. But a sudden downturn will drive home the importance of risk management. Unfortunately, that lesson will be forgotten as soon as the good times return.
So perhaps as a constant reminder, an investor should have a checklist on risk placed in a prominent spot on his trading screen. What would be on my checklist? Well, first on the list would be: Don't over-extend yourself by taking on huge loans. Leverage, as we all know, cuts both ways. In a rising market, it boosts your return on equity. In a downmarket, it can bankrupt you. No need to look far for examples of that.
Next, when engaging in speculative trades, risk only the capital you can afford to lose. It is unwise to put one's entire life savings in speculative small-cap stocks or their warrants or even structured products which one may not understand. It absolutely befuddles me that some private bankers would put their clients' entire life savings into structured products alone. Some investors saw their entire portfolios go up in a puff of smoke after the collapse of Lehman Brothers.
Perhaps the private bankers themselves don't understand the risk of these products. Perhaps the collapse of Lehman was totally unforeseeable. Still, putting everything one has into a single investment product is not a good idea.
Also, I always try to remind myself: The lower the market goes, the lower the risk. The higher the market climbs, the higher the risk. This is counter to what our emotions would have us believe. When the market is going down, we are gripped by fear and paralysed into inaction, or worse, panicked into selling. When the market keeps going up, we are motivated by greed to make a quick buck. This reminder is good to have in front of one's trading screen!
According to Mr Sperandeo, nicknamed Trader Vic, only 5 per cent of all rallies go up 40 per cent without a correction. And once a rally goes past 107 days, its risk rises from low to moderate or high. Beyond 242 days, the risk is very high. "Rallies are like humans. Getting into the market now is like buying an 80-year old man. Yes, he can live to 85. But if you buy a 21-year-old, you have better insurance," he said when he was in Singapore recently.
A number of trading rules are also targeted at risk management. Rules like: Use stop-loss orders whenever practical; When in doubt, get out; Be patient, never overtrade; Buy weakness and sell strength; Be just as willing to sell as you are to buy; Never initiate a position in a fast market; Don't trade on the basis of "tips".'
Ultimately, the objective of all these risk management pointers is to PROTECT YOUR CAPITAL. And that should be the heading of your checklist, in bold capital letters!
PULSES JULY 2009
"THE DIFFERENCE between a good trader and a bad trader is risk management," says Victor Sperandeo, a veteran
Wall Street trader with more than 40 years' experience.
Indeed, for reckless traders, events of the past 18 months would have wiped them out completely with a slim chance of any comeback. Typically, in a bull market, investors don't worry too much about risk. But a sudden downturn will drive home the importance of risk management. Unfortunately, that lesson will be forgotten as soon as the good times return.
So perhaps as a constant reminder, an investor should have a checklist on risk placed in a prominent spot on his trading screen. What would be on my checklist? Well, first on the list would be: Don't over-extend yourself by taking on huge loans. Leverage, as we all know, cuts both ways. In a rising market, it boosts your return on equity. In a downmarket, it can bankrupt you. No need to look far for examples of that.
Next, when engaging in speculative trades, risk only the capital you can afford to lose. It is unwise to put one's entire life savings in speculative small-cap stocks or their warrants or even structured products which one may not understand. It absolutely befuddles me that some private bankers would put their clients' entire life savings into structured products alone. Some investors saw their entire portfolios go up in a puff of smoke after the collapse of Lehman Brothers.
Perhaps the private bankers themselves don't understand the risk of these products. Perhaps the collapse of Lehman was totally unforeseeable. Still, putting everything one has into a single investment product is not a good idea.
Also, I always try to remind myself: The lower the market goes, the lower the risk. The higher the market climbs, the higher the risk. This is counter to what our emotions would have us believe. When the market is going down, we are gripped by fear and paralysed into inaction, or worse, panicked into selling. When the market keeps going up, we are motivated by greed to make a quick buck. This reminder is good to have in front of one's trading screen!
According to Mr Sperandeo, nicknamed Trader Vic, only 5 per cent of all rallies go up 40 per cent without a correction. And once a rally goes past 107 days, its risk rises from low to moderate or high. Beyond 242 days, the risk is very high. "Rallies are like humans. Getting into the market now is like buying an 80-year old man. Yes, he can live to 85. But if you buy a 21-year-old, you have better insurance," he said when he was in Singapore recently.
A number of trading rules are also targeted at risk management. Rules like: Use stop-loss orders whenever practical; When in doubt, get out; Be patient, never overtrade; Buy weakness and sell strength; Be just as willing to sell as you are to buy; Never initiate a position in a fast market; Don't trade on the basis of "tips".'
Ultimately, the objective of all these risk management pointers is to PROTECT YOUR CAPITAL. And that should be the heading of your checklist, in bold capital letters!
Subscribe to:
Posts (Atom)