When Risk Goes Up

Asad Dossani
Each morning I check the overnight market moves. On most days, market moves are small. But occasionally, market moves are drastic. These drastic moves make you feel like you are on a roller coaster, sometimes going up and sometimes going down. And too much of this makes you feel sick.

Trading is inherently risky. And in certain market conditions, the risk can skyrocket. Last week, commodity markets were extremely volatile. For example, crude oil dropped by more than 10% over a two day period. And other commodities saw moves of 3-4% in a single day.

Here are two facts we know about volatile markets:
  1. All markets go through periods of high and low volatility.
  2. There is a positive relationship between risk and return.
The upside here is that when markets are volatile and risk is high, we can potentially earn higher returns. As a result, volatile markets are good for traders.

But there is of course a dark side to increased volatility. And this is due to a fundamental human characteristic. I'm talking about risk aversion. As humans, we inherently dislike risk.

This is why when we see such large moves in markets, we get scared. When we incur a large trading loss, we feel a pain in our stomach.

But perhaps the biggest danger of volatile markets is that we lose our discipline. If you have a trading system in place, a few large losses can make you rethink whether you should keep following it.

Nonetheless, it is important to keep following your system and maintain discipline through volatile markets. Here are some steps we can take:

First, don't check your portfolio more than once a day. Unless you are trading intraday, there is no need to check your portfolio every hour. Doing so will just lead to a roller coaster effect. Think about what happens in the moments before you check your trades. Your heart beats a little faster and adrenaline kicks in. Too much of this is not good for you. It is best to check your trades once a day and not worry about it after that.

Second, remember that you need volatility to make money. Since higher risk implies higher returns, volatility will help your portfolio in the long run. Even though you have bigger gains and losses, the bigger gains will outweigh those losses if you have a good trading system. As long as you aren't risking too much capital, you can expect to come out ahead. The biggest danger here is inadequate risk management.

Third, low volatility will return to the market. High volatility does not last for long periods of time, and markets will return to normal. In fact, most of the time market volatility is low. For example, the large moves in commodity markets last week haven't been seen for a few years. This extreme volatility really is quite rare.

Fourth, this gets easier over time. I used to get upset over large trading losses during volatile markets. Today, I get less upset. I still have some emotional reaction, but it has lessened over time. Hopefully you are experiencing the same thing. If not, take a few deep breaths when you feel stressed. Do this regularly, and you'll see a big difference soon.

Most new traders fail because they let their emotions get the best of them. And the most successful traders do a good job of regulating their emotions, regulating their stress, and focusing on improving performance.

How do you manage your emotions after a large trading loss? Share your views in the Club or share your comments here.

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8 Responses to "When Risk Goes Up"
vinay grover
04 Dec, 2014
It is indeed the truth that most of the advisers, they themselves do not know anything much. The government should ban all such outfits. These advisers can not be checked to what they say to buy and sell, once these guys are checked, they all will be behind bars because most of their calls are nothing short of crap. Like 
03 Dec, 2014
Good article Asad. Checking the portfolio often times will not help you to take the correct decision.Like 
03 Dec, 2014
I will purchase a small gift and give it to my daughter... Like 
03 Dec, 2014
Hi, I agree with "Caetano" comment. At the end of the month our profits will almost zero or negative, the way we are getting recommendation. As Mr Dossani, mention we have 10% or 3 - 4% volatility in last month, why can't we reduce our losses during these period. I observe team is monitoring till 5:30 PM for any recommendation and the commodity market will work till 11:30 PM. When team is available till 5:30 PM and the recommendation is going in negative direction nobody will warn us. When we see next day morning we will suffer a lot. I told this point to the customer care service team, I don't know whether they have consider the point. Also, when the recommendation will come, we don't know what should be the stop loss and how much percentage it will move. When the scrip is moving in any of the direction (whether positive or negative for us) we do not know where it stops until next day or another we will get the recommendation, till that time it may go in any of the direction. I request Mr. Dossani to think about Stop loss or to provide target expectation in the recommendation. - Thanks, NoorulLike 
02 Dec, 2014
Taking risk is a way of life and to be successful trader one has to have full faith in the trading system and leave the profit and loss to ALMIGHTY. Like 
02 Dec, 2014
Makes good reading with very practical guidelines.Like 
R S Narayan
02 Dec, 2014
Suggestions are good Trader must check portfolio often alteast once every 30minutes because it will tell you the trend and throw light on causeLike 
02 Dec, 2014
Hi this is a good advice when given in general. But how do you explain it to us Mr Dossani when in context to current market volatility. First of all I am disciplined in that I buy each morning basis your alerts and only check my portfolio next day to check profit loss. Dats it. And I have traded every alert of urs. From my part I did everything I can. Yet one day gold gives me a huge Inr 50k profit. I'm happy till next day all of it is taken away. Then u ask to trade in silver which made a huge loss. Now tell me why in ur next day email you don't take any personal ownership for inr 75k fees u have charged me upfront. My principle is gone to waters. Its on you Mr Dossani. If all you want to say is take a few deep breathes then pls stop writing these fruitless emails. Rather take this feedback. Firstly your system is influenced by world events I mean currency n commodity. Just a one time fundamentals of how these forces act is not enough. Pls do us a favour and instead of solely relying on your technical n speculative evolving system of yours also hire someone to feedin this very important data. Or do it yourself. How can you totally miss out forseeing this once in many years of volatility. If you had done that a short would have been a long. And upon that you tell us that volatility is good. Instead tell this to yourself that it is as good as your identifying the direction what's the use of all months of profits when a single deal wipes out all your principle. Secondly you have a very complex free course in commodity but something as basic and essential ingredient of recommendation services like how to trade about lot sizes about market times about margins and in what way the recommendations would come all this basic information was asked my only point of contact ..your customer care people who are eqm staff and they were clueless. What a shame n disappointment. Please give them some basic understanding. And why in currency segment I observe that only when a trade goes nnegative you give a new alert. Does that imply that you just sit on it until something drastic needs to b done. Are you saying till a trade goes negative say jpyinr no other currencies were doing better. I'm sure u will agree to my above points that its on your side that your homework requires self review. Its a very cheeky way to shield yourself from your subscribers and render urself unreachable. By the speed at which we r going which is about 20 to 25 alerts of net profit and a single alert to drop below square one I am never going to make mamke net profit let alone recovering inr 75k fees I've paid. Please don't respond act instead Regards CaetanoLike 
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