Investing is a mind game. It’s an easy thing to setup your charts and have your rules but when it comes to putting the ‘hard-earned’ on the table and pulling the trigger, things can change, quickly. Following those rules all of a sudden becomes harder. Emotions such as paralysis, fear and doubt swirl about in our heads. These sometimes-crippling emotions are what we need to control and that means learning how to go about building a safe profitable risk-managed portfolio of stocks and confidence will build from there.

So, where do we start? A Stockradar member recently provided a great link to a three-part series about 6 successful practitioners of their own professions, they were all given some money and put on a trading desk to see if they could convert their own successes into becoming profitable traders. See what happens, it makes for very interesting viewing. It’s good for us all to see this and understand that this job ‘ain’t easy’. Watch the lady that flies under the radar and goes about it with humility, poise, confidence, and in the end success, and seemingly, no stress.

Here’s the link: https://www.youtube.com/watch?v=oXno18pOHgo

We need to understand how to control our emotions enough to build confidence in our investing, so we feel safe, and in control. How do we gain that confidence? This is very much a cognitive process of believing in what you do and a very good way to deal with this is by knowing and trusting your system well. An integral part of that is having a controlled risk and money management procedure that keeps you safe. These are two essential components of a trade plan. It’s just like AA, a step by step process.

How the hedge fund process works in this video is one example of managing risk. A hedge fund is actually very simple to explain and understand, it runs both long and short positions in related financial instruments that move and sway together. The idea is to win more on one side of the bet than the other and by having a bet both ways it limits risk, so they are not ‘naked’ or exposed. When one falls the other will rise. This in one way to manage risk. Another way can be an offsetting option strategy over a physical holding. Here again you need to learn your trade, but you get my gist we all have to have some form of risk management. It’s like a safety valve. Once you understand that concept you are more than halfway there and that feeling of safety builds.

My (Stockradar’s) world is a very simple place of using a systematic investing model that I’ve tried, tested and tweaked over the years that tells me exactly when to buy a stock and at the very same time it sets a maximum risk level on a trade. That way I know exactly my risk before the trade is entered and am not ’naked’ or at more risk that I am comfortable with. If it’s too great you either tighten the stop or reduce the amount of stock you hold. The risk management for the model is based on the premise of simply cutting out the possibility of big losses (drawdowns) from my trading. That makes it a comfortable proposition when trades are put on.

You know the drill: There are four potential outcomes of a trade:

1. Big wins (unlimited)
2. Small wins
3. Small losses
4. Big losses – exclude (limited to a predetermined amount)

See Stockradar’s complete Trading Strategy.

Big Losses are simply excluded by the money management process. It’s a risk and money management strategy. You might have seen the Stockradar model of open positions table in the last newsletter. (Radar Newsletter 8/11/19) It shows how it runs and holds profitable trades while cutting losses before they grow too big. There are no losses at the top of the table, I don’t hold them. It’s a simple, effective, ongoing, manageable process.

We all need a risk and money management strategy that prohibits us from taking big losses, whether we are a hedge fund, using options, or in my case a simple stop strategy.  Big losses are the killer of a portfolios value.

A good trader or investor knows that you do your analysis, you make you play, and then with an overlay of risk management on the trade you control the outcome and then you can be confident of a positive overall result, be it a small loss or big profit. Not on each specific trade but on a portfolio basis. Note again the video points to the fact that good investors build a portfolio, of trades or stocks, not base success on a single trade. That doesn’t work because if you benchmark yourself on each trade you are setting yourself up for failure – in your mind. We need to take control of our minds. Not every trade will be a winner and that’s OK.

By following this process of trade and money management we will start to build profits over losses and slowly but surely as you understand the importance of a risk/money management and the portfolio process, you will find it easier build a positive mindset. Confidence plays a key role in implementing your trade correctly.

This no doubt this takes time, patience and discipline, but nobody said this game was easy. The video shows how tempers can rise and pressures can explode and there are many videos of this nature you can find on the Internet that will show you exactly the same effect and outcome of trading on an individual who doesn’t know how.

We are all humanly repetitive! We need to learn from this and change our (natural) behaviours with the resulting success reinforcing the necessary process. That builds our confidence.

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