I did not include those risks as part of the statements. The statement talks about your risk. Your risk is the risk to you (external risk) and the risk from you (internal risk).
Let's examine this further:
External risk is something happening beyond your control - . There are only two ways to manage these risks which is
1. when in a trade, always have a stop loss
2. when entering a trade, use the correct position size as a function of your risk (i.e. the risk to your equity)
Internal risk is (and newbie traders may not realize that there is something like this) is the risk that is caused within you by you, and is not related to the market.
1. not preparing a what-if analysis, thus increasing risk of impulsive decisions that are non-corroborated by your knowledge / system / true intuition
2. having a plan but throwing it out of the window when confronted by down ticks, up ticks and in the face of uncertainty
3. moving your stop and holding on to (and/or averaging a losing trade by increasing position size)
4. not recognizing potential flaws and emotional states that may sabotage your trading and/or not doing anything when being aware of self-sabotage
And the potential part?
Managing your potential.
Note that this comes after the risk is managed.
Examples include, but are not limited to:
1. Exiting a position too early because
a. You were influenced by a recent loser that makes holding on difficult and you see a false shadow that lurks in the dark to snatch your profits (when it does not for the precise reason that you have now managed risk and the shadow is simply a shadow of self-doubt and does not take probability into account.)
b. You are succumbed by the need for instant gratification and do not adhere to your principles.
Note again that this is about your potential, since trading is one of the few fields where upside potential is unlimited (and if I may add - if unmanaged, downside risk is unlimited)
I think I can expand this further but it is a long post already. Phew, and thanks for reading. :-)
The following 6 users say Thank You to iqgod for this post:
Mike this question is in the same league as the search for the holy grail. There is no single most important rule. They are all as important. You are looking at it as a programmer looks at things. I would tend to believe in trading like in life the whole is greater than the sum of its parts.
The following 3 users say Thank You to trendisyourfriend for this post:
To always remember your capital is your inventory without it you have no business.
"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."
The following 2 users say Thank You to liquidcci for this post: