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Hirschhorn: Smart Risk, Stupid Risk

(Video: Market coach Doug Hirschhorn, PhD, discusses the five things traders can do to take smart risks in the market.)

For now, the market really has no idea which direction it's headed. Is it a bull or is it a bear. Are we set to take off, test new lows or stay flat for the foreseeable future?

The truth is, people always speculate, but no one knows for sure what's going to happen. And that's why it's a market.

Here are 5 things you can do to take smart risk in uncertain situations:

  1. Look inside yourself and pay attention to what you feel Our bodies are hardwired to sense things before we fully understand why. Call it intuition, instinct or whatever you want, we all have it. The point is, in a game where uncertainty is the status quo, the best indicator you have is your gut. Trust it.
  2. Trust the markets Have faith, yes, faith. The markets will continually present you with opportunities to make great trades. If you trust this, then you won't rush into or out of trades because of fear.
  3. Recognize fear Look for fear in the market's behavior (over-selling or over-buying). Over-selling means people are afraid to take big losses. Over-buying means people are afraid they are going to miss out on profits. Once you know what over-selling and over-buying look like, you want to either avoid it, if you're not in the market; ride it out, if you're already in the market; or fade it, if you're looking to get into the market.
  4. Trade to make money, not to be right If you want show people how smart you are, teach at a university or write a book. If you want to make money, do more of what the market is paying and less of what it's not.
  5. Love to take a loss Yes, losses are your friend, not the enemy. Losses, like profits, are a necessary and essential part of the trading game. After all, even the best traders on the Street have a winning percentage of about 50 percent, so relax.

Trading really is a game of probabilities, not perfection. Put these five things in place, you can take smarter risks in uncertain markets.

Think better, invest smarter.

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Doug Hirschhorn is the chief executive officer of Edge Consulting, a firm specializing in “Peak Performance Coaching.” He holds a Ph.D. in Psychology with a specialization in sport psychology, and has offices in New York and South Florida. His client list includes elite athletes as well as many of the largest banks, hedge funds and financial institutions in the world. Doug is presently at work on his new book, 8 Ways to Great (Putnam, 2010).

Have a question for Doug? You can reach him through his Web site, DrDoug.com

Disclaimer: Doug Hirschhorn's expertise is in the psychology of achieving peak performance. He is not a financial advisor and does not make trading or investment recommendations or provide trading or investment advice. He is an expert on the mental game. Although Doug Hirschhorn has a Ph.D. in Psychology with a specialization in sport psychology, he is not a licensed psychologist and does not provide therapeutic, clinical or counseling services.