Alan Hull Articles
Children of the Bear

I was very unfortunate as a novice Trader to have cut my teeth on a Bull market. The result of which was a fairly high degree of skepticism towards risk management. If a trade went sour during the 1990s you could usually just hold onto the position, eyes closed and breath held, and 9 times out of 10 it would recover. But failure to use stop losses is akin to driving a car without wearing a seat belt. During my 20 plus years as a driver I have never suffered the misfortune of being involved in a car accident but I still wear a seat-belt at all times. So why should I ignore my stop losses and run the very real risk of falling foul of the likes of HIH or Onetel? The answer is simple... the toughest aspect of share trading is cutting your losses.

Most of us simply don't want to sell a losing position and realise a loss. To this end we will seek reasons for not selling and we will latch onto arguments such as 'Buying & Holding' is just as profitable as using stop losses. This is quite often the case and I won't disagree... when it comes to profitability. I will, however, vehemently disagree when it comes to protecting capital. To put it another way... your car's performance doesn't depend on whether or not you wear your seat belt. Risk management is about PROTECTION... not performance!!!

The trouble with protection is that it is a very hard product to sell. Several market newcomers have contacted me recently, lamenting the fact that they have experienced nothing other than a string of losses from the first moment they entered the market. On further investigation I usually uncover scenarios like '6 straight losses and I 'm down about 5%'. I wish I could strap a Bulletproof vest on these novice traders and then shoot them 6 times... then maybe they'd understand their good fortune. But ignorant or not... blessed are the children of the Bear.

First Published: 13 February 2003 - Copyright © Alan Hull

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