Money Management & Risk Control - Part 3
The key to not going broke is to
respect risk, take small positions that wont allow you to blow out.
You must always keep in mind that in trading you are only playing the odds.
You may have a setup that is correct 75% of the time but each trade is
a random event. It doesn't take into account the last trade. If you
have a 75% system, you can still be wrong 10 times in a row, and if you
trade for any amount of time it will happen.
I once thought I had a foolproof
way to make money at roulette. I would bet on black and red. I would
sit at the table, and after the ball had landed on black or red 5 times
in a row I would start to bet on the opposite color (so if it were 5 reds
in a row I would start to bet on black) Then, if I was wrong, I would go
ahead and double down, meaning that if my starting bet is $1, the next
time I will be $2, then $4, then $8, then $16 etc... Eventually I would
win, and would come out $1 ahead. So I am 13 years old and really
thinking I have the Holy Grail. If its so easy for a 13 year old
to figure out, why is it that all the casinos are not out of business and
we are all millionaires. Simple. It does not work.
If we are flipping coins heads has
a 50% chance of turning up on each roll, and so does tails. But each flip
is independent of the last. The last coin toss has nothing to do with the
one before it. It's a random event. There is a certain chance heads
will occur on this roll, or that tails will. But which of them it is that
comes up is a random occurrence. Each time you flip a coin it is one flip
of a coin amongst the billions of times coins have been flipped. That's
why you can roll 100 heads in a row if you do it long enough. That's
why the first time I played roulette black came up 19 times in a row and
I went home defeated.
Trading is the same. We have a certain
percentage of our trades that will work out, and a certain percentage that
will not. But your next trade has nothing to do with your last one. So
even if you have the world's most accurate method, over time you will go
broke if you don't practice good money management and risk control.
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