Profitable ETF Trading Strategies: Risk management and re-entry

If risk management is the key to long term survival in a volatile stock market, then re-entry is the key to sanity.

Just as there are old mountain climbers and bold mountain climbers, but no old, bold mountain climbers, you can bet that life long traders have mastered the essential first law of trading: don’t explode.  No matter what you calculate as  the odds of an adverse move, you can be sure that you have missed a hidden variable that the market will employ someday to snatch away all of your ventured capital on a particular trade. If that surprise event results in you going broke, then you failed the first test of trading.

A healthy respect for uncertainty and risk may see you making decisions to exit positions before driving off  what may be a cliff right around the next corner. Sometimes though what’s around the bend may be easy driving to the land of milk and honey. Imprudent traders that flew right past you, speed unchecked around the bend will get to the reward sooner than you. If you don’t have a plan for re-entry you may miss your share of the reward altogether.

When that happens, it would be normal for you to experience regret, and if it happens enough times you begin to doubt your self and your rules and you become tempted to change on the fly.  Then your rules become nothing more than your current state of mind which can be influenced by so many other factors that you have essentially relinquished the ability to reason consistently through changing market conditions, and that becomes a functional definition of driving yourself crazy.

So, to offset that urge to speed around the corner for fear of missing out on the rewards that other, bolder traders are eagerly chasing, remind your self that its a long journey, and that there are rest halts along the way for you to do maintenance, and that you will get there, on time, in your own time, and in your own risk managed way. As long as you have a plan for re-entry, you won’t drive yourself crazy worrying about the rewards you may have missed around the corner. You will get there, just don’t be in a hurry.

Taking care when going around corners will let you listen for the sound of a crash when the bold traders get surprised by an infinitely variable market that plays by its own unknowable rules.

Tortoise Capital Management © 1996 Frontier Theme