The Guest Blog

Dr. Doug: The Right Amount of Risk

Dr. Doug: Righting the Risk

Video: Market Coach Doug Hirschhorn discusses how traders can adjust risk and keep themselves from getting too hot or too cold, particularly toward the end of the year.

The fourth quarter is generally the time of year when traders do one of two things: they either trade defensively and take too little risk or they trade aggressively and take too much risk. Either way, it's important to understand these are "fear-based" decisions that hurt performance.

To make sure you end the year trading your best, follow these three steps designed to help keep your head in the game until the last trading day of the year.

  • First, look for warning signs in your trading. For example, are you cutting winners too soon? Are you finding yourself too big or too early in trades?
  • Second, document the behavior pattern and look for what I call "performance triggers," things that trigger you to become defensive or too aggressive.
  • Third, immediately cut your initial position size in half. I know this sounds counter-intuitive to being profitable, but remember, we’re dealing with "fear-driven" behaviors and the root of that fear has everything to do with focusing on the money.

So, if you suffer from defensive trading, making smaller trades will remove the stress from the situation. On the other hand, if you struggle with being too aggressive, making smaller trades will keep you in the game longer.

In the end, you want to be in a position to make great trades when they appear, regardless of the time of year. The key takeaway here is simple: Focus on the process and the outcome will take care of itself.

Think better, invest smarter.