Wed. Oct 27th, 2021

How to build a low-risk portfolio inoculated from chaos

The market is under innumerable forces beyond our control. Political struggles, natural disasters, overwhelming predictions, all of these things can derail even the most well thought out and carefully planned business plan. So without the forecast needed to predict all the uncertainty the market will generate for you, how do you prepare for uncertainty?

While we are at the mercy of the market, there are a handful of tools we can use to combat the worst consequences of disaster by creating a low-risk portfolio.

While some of the tools may seem basic to more advanced and expert traders, they still need to be highlighted. Each time, we see that several experienced operators fail daily in these basics.

Basic risk management tools

We have no control over the market – Once you are in a trade, accept that you have no control over the direction of the market. Everything you do will not really affect a market.

Put your ego aside – You are a small player and the hard truth is that your operations will not affect the market. Understanding your little footprint is a key thing when it comes to erasing our egos.

Control the size of your position – It is imperative that we let the mental trade take control of any emotional decision. The only thing we have control over is position size. While the market acts against our expectations, we can reduce exposure and reduce risk. If you come with us, we can add as the market shows, and so on.

Use catastrophic stops – If the market pushes very hard against us, we still want an automatic order waiting for us to protect what is left of our funds. However, this is a very dramatic move and should only be used as a last resort. Hopefully, you will be able to reduce losses sooner by using well-practiced mental techniques before you find yourself in the position of needing such dramatic action.

Gradually increase your position

In addition to the four tools for a low-risk portfolio we have outlined above, a general concept that all traders who have a risk aversion should know this starting from a small position and only increasing the size as the market moves in your favor.

The key here is that you can always add, but you don’t have to take the full position for which you were originally assigned. Only after the market has given you some benefits to protect or secure towards management should you take your step.

Leave your ego at the door

Along the same lines as eliminating your ego, you need to understand that you can’t manipulate prices. To repeat, most of us are small players and any order we place in the market will not replace the price. All we can do is go in and let the market greet us anyway. In this sense, we can control our attention to how the market changes while we are in a position.

Due to this inability, we need to re-evaluate our analyzes over and over again. We have to be very dynamic with the way we manage the position. We need to modify our trade with new information that constantly appears. This means setting our goals and redefining the level at which we believe the market will have a hard time getting through. Always be on the lookout for the market to go suddenly. All of these things need to be addressed.

As mentioned in the introduction, massive events can occur at any time by surprise. Events such as political speeches where new rules are introduced, central bank interventions, a conflict between countries, natural disasters, etc. What happens to the market when a volcano erupts and stops air travel for weeks? Unexpected events that can happen in a minute are anomalies that we have no way of dealing with if we are not prepared.

Prepare your portfolio for the worst

Always think that something bad can happen. Start slowly, create protections, and then you can add them that way.

So how can you create a low-risk success portfolio in this environment?

Write a detailed action plan.

Map of all the possible scenarios you have experienced in the past second your business strategy. Write a detailed action plan for all of these scenarios. This provides you with a tool that allows you to always respond quickly by triggering an action plan without thinking. It’s automatic and it’s one of your best defenses. If, for some reason, it turns out to be wrong, take the loss, be glad you had the action, and adhered to it.

Once you are out of the market, correct the action plan so that the next time it is implemented it is the right move. Don’t fix things while you’re in a trade. Your judgment is under pressure and it is a bad environment to create a solution.

If you do not have a business plan, you can download it The5ers Free PDF.

Stay tuned while holding the position

If you do not use the file fix and forget strategy remember that the market is always changing, so you should be able to do that too.

Don’t get stuck in the analysis. Evolve as the market presents you with more information. Leave your ego at the door if you want to achieve a successful and low-risk portfolio.

A good trader knows that a low risk portfolio is built slowly, but everything can be lost quickly, so it reduces losses as soon as the market goes against its position.

Learn to love your losses

Recognize that losses are part of the job and you need to accept them and convince yourself that taking them according to plan is a healthy behavior that will save you in the long run from damaging your portfolio.

The result of a trade does not make it good or bad. A good or bad trade is defined as a trade that follows your business plan and strategy, regardless of the outcome.

Following your business plan

Participates in less emotional decision making.

Work following the planned actions and follow them like a well disciplined robot.

This is the exact reason why you created an action plan. Everything has been written from your experience as a trader. Thanks to this, you can now act in the right way and improve your statistics.

Keep and have faith in your plan.

Did you forget to map something or did you miss some piece of the plan? Guess what? This happens to the best of us, at least at first.

You should be tolerant and not get hit by these kinds of mistakes. Suppose you find transgression in a trade, the best thing you can do is get out of position. Don’t stay there because you have no plan. Make this one of your master rules.

Get out, learn the scenario and create a plan. Next time you have your action plan ready for the moment it comes up. Don’t be in the market when you have a hole in your plan. This is the most important of all the rules.

Low risk portfolio

While nothing is certain and all that is described above is just a roadmap to avoid the pitfalls that a chaotic market can present, ultimately it is up to you to properly anticipate and establish a plan to navigate crises. If you look at the details and study and elaborate carefully, there are few reasons why you may not be successful and thrive even in the most volatile markets.

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