As traders there is probably nothing more thrilling than correctly anticipating the markets or a particular stock and making a huge profit off the trade. You feel on top of the world. After a good winning streak it is very tempting to let lose and start making some big trades, after all, you are invincible, at least for now. Although you should take advantage of a hot streak when you hit upon one, you must avoid acting recklessly, it can destroy you. I have
Jeffrey R. Immelt
personally seen it too many times, the "BIG idea". Because we are hot and we sense a big move coming, instead of following our plan, our proper position size, we decide to risk it all. We buy as many shares or contracts, as we have dollars in our account, and margin it to boot. The market goes against us, but we feel OK because we are hot, and we know we are right. The market will soon realize that we are right. I don't have to finish this because you know where it leads, at least I hope you do. Even when on a hot streak, you must, for long-term survival maintain discipline and manage risk.
After making a series of winning trades, you want to celebrate; you should. However, you must avoid thinking, "What do I have to lose? I'm far ahead of the game. I can take a little more risk." What is the harm of taking big risks I'm way ahead? The problem is you really do not know that your next set of trades will be wins, and when you take unnecessary chances, it is as if you are working under the assumption that you will tend to win in the future. No one has a crystal ball! Trading is about taking advantage of probabilities. From the perspective of probability theory, it is possible that you will continue to win, and by making larger trades and lowering your limits, you will reap big rewards. But in all likelihood, the next series of trades may be losers. If you don't continue to manage your risk, you'll tend to give back all your profits and more.
One may not fully consider the realistic possibility that a losing trade is on the horizon. It is important that you maintain a little skepticism, though. It is nice to feel you are running hot, but remember that your hot streak may end as quickly as it started. Never let your guard down. Always be prepared for your luck to change. An unexpected defeat is often more devastating than an expected probable setback, always be ready for a potential loss. By remembering that a loss is always possible, and that it is not a big deal, you will be prepared, and won't be fazed when it happens.
Managing risk is a trader's secret weapon. Do not take unnecessary chances. Trading is a game of survival. Sure, you must make big profits while you are running hot, but you must avoid mounting huge losses when you are running cold. Do not be caught off guard. Consider every possibility. Continue to manage risk. It can go a long way in helping you stay profitable in the long run.