What is Mistake "Failure to Control Risk" in Trading? 

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What is Mistake "Failure to Control Risk" in Trading?

If you were going to engage in some highly risky activity other than futures trading you would likely spend a fair amount of time planning out how to avoid the associated pitfalls. For instance, if you were going to go sky diving it is probably a safe bet that prior to the jump you would check and recheck your parachute almost to the point of obsession. However, as I said earlier, futures trading is unlike any other endeavor. In futures trading it is not uncommon to see people run out the airplane door without even looking to see if they have a parachute. These traders usually fall into the category of new traders who are hoping to make "easy money." However, even veteran traders who should know better occasionally fail to keep their guard up. And when they do they pay dearly. Make no mistake about the vicious nature of futures markets. If you make a mistake, and leave yourself exposed for one moment, the markets can reach out and knock you flat. If you don't believe me, ask Victor Neiderhoffer.

Victor Neiderhoffer was a highly successful futures trader for years (his managed accounts averaged a 31% annual return over a 13-year period) and the author of the best-selling book "The Education of A Speculator." In October 1997, the fund run by Mr. Neiderhoffer was short a large quantity of S&P 500 put options (which means he would lose money if the market fell). The market had been declining and Mr. Neiderhoffer believed the market was due to bounce back quickly. On October 27, the Dow Jones Industrial Average fell over 500 points in a single day. Because he still felt he was correct that the market would bounce back soon Mr. Neiderhoffer did not cover his naked put positions. In one of the greatest ironies in futures trading history, he was in fact correct and the market started to bounce back the very next day. That was the good news. The bad news was that by the time that happened his fund was out of business. When the positions were marked-to-market at the close of trading on October 27, 1997, the fund was allegedly some $20 million dollars in the hole. The fund's clearing firm closed out all the positions (just before the market turned around) and their people contacted Mr. Neiderhoffer's people to discuss how to make good on the slight $20 million deficit. The moral of the story: risk control in futures trading is NEVER optional.

Categories in Trading Mistakes

Lack of Trading Plan
Planning plays a key role in the success or failure of any endeavor

Using too much Leverage
Determining the proper capital requirements for trading is a difficult task

Failure to control Risk
Refusing to employ effective risk control measures can ensure your long-term failure

Lack of Discipline
A lack of discipline can destroy even the most talented and best prepared trader

Useful Advices to Beginning Trader
You can control your success or failure

All about Stocks
Encyclopedia about Stocks. That you should know about Stocks before starting

Forex Glossary
All terms about Forex market

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