Page 386 - THE MARKET WHISPERER

382 PART 11 - Risk Management

personal usage, we tend to view the transaction as a loss.
What significance do you apply to losses derived from stock trading?

A pro will absorb losses as an inseparable part of the profession. This
does not meant the pro reaches a 1:1 psychological balance between love
of profit and hate of loss, but it is reasonable to presume that his or her
psychological stability will be greater than that of an amateur for whom
loss holds greater weight, even if the amateur loses the same amount as
the professional trader and their point of neutrality is identical. In short,
we can conclude that the amateur trader’s red line will be different to that
of the professional, or simply put, each person’s red line will be different.

This is why it is essential for you to define your own, private red lines
in advance. Doing so will improve your chances of success. Your red line
should be based on the amount of available money you are prepared to
lose. Money intended for buying a new car or for the family’s vacation is
not available money and should not be used to fund your trading account.
This is scared money, which you are scared to lose. Later we will discuss
mental management more deeply.

SMART Trading with “scared money” causes improper psychological
MONEY management, increases hatred of loss, and almost always
leads to real losses.

Leverage Risk

If you open a trading account with a US broker, you will be able to get
margin of 4:1 by simply signing a margin agreement with the firm. If you
are not a US resident and you open a trading account with a non-US broker,
you will be able to get a margin of up to 20:1. A 4:1 margin means that if
you deposit $10,000, you will receive leverage when you execute intraday
trading of up to $40,000. This is called intraday margin. By contrast, if
you hold stocks overnight, you will be able to receive margin of only 2:1,
called overnight margin. A 2:1 margin will let you sleep on stocks valued
at double the amount you deposited in your account. The reason for the

broker reducing margin on overnight usage is due to the fear of financial

announcements that may go public after trading hours, endangering your

money as well as the leveraged funds, which are the broker’s money.
A 2:1 margin held overnight will cost interest, but the 4:1 intraday

margin or even 20:1 margin does not. Most traders use margin. If you also
plan to do so, you need to be aware of the risks involved and manage them

correctly.