Uncertainty and Risk in Short-Term Trading

[Joe Ross 10]

Trading and risk go together. Short-term trading denies the trader the strategy of minimizing risk by holding a position over a longer time period. Short-term traders must learn to use momentum and volatility. Volatility can force short-term traders to become scalpers. I know; often I am one of them. However, the scalping, in turn, causes a lot of "noise" in the market. When enough people are scalping short-term, the market becomes full of noise. At that point, prices begin to fluctuate rapidly and risk is increased. In that respect, scalping can work against short-term trading.

 

All of us have a built-in aversion to risk. Traders, if they can still pull the trigger, have no problem entering into what seems to be a sure win  but when it comes to a trade with a clear possibility of loss, they hesitate. Traders in general don't like taking losses, and will do anything to avoid taking them. They will take even greater risk in the hopes of avoiding a loss. We see it all the time: a trader holds onto a trade while the losses continue to mount. They will pretend that the losses aren't really there. Rather than realizing a loss, they stay in the market and hope they will not be wiped out. The ultimate manifestation of this is seen in the dead accounts; accounts that don't trade, which amount to money in the billions held by brokers, simply because the trader leaves the money rather than close out the account and admit defeat. There is always the "hope" that some day, sometime, they will trade again. The State of Illinois gets rich from those accounts, because after a certain number of years they have the right to confiscate them.

 

If you are going to be a professional trader, you cannot avoid risk and losses. They are simply a part of the business of trading. You don't have to learn to love them, but you do have to learn to accept the fact that they are a reality of trading, and work at disciplining yourself to keep them to a minimum.

[tradelab03 10]

Any time you put money at risk for the chance of profit, there is an inherent level of uncertainty. When new threats such as war or recession arise, the level of uncertainty increases significantly as companies can no longer accurately predict their future earnings. As a result, institutional investors will reduce their holdings in stocks considered unsafe and move the funds to other sources like precious metals, government bonds and money-market instruments. This sell-off, which occurs as large portfolios reposition themselves, can cause the stock market to depreciate.