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Trading is risky. No doubt about it.
However, fortunately for us, trading risk can be managed!
Whoever deals with trading knows that this activity implies making choices and decisions, from the choice of the broker to the stop loss value more suitable to trade a specific market.
These choices play a fundamental role in risk management and if they are made with the right knowledge and skills, they allow us to reduce risk considerably.
In this interview with radio-journalist Debora Rosciani (Il Sole 24 Ore group), Andrea Unger talks about trading risk and offers many tips and essential indications to evaluate and manage this risk in the best way possible.
Here are some of the topics discussed in the interview:
- The best strategy to correctly assess risk
- Why having a trading plan is only useful if we can stick to it
- How to properly use leverage
Enjoy the video! 😎
Is trading very risky? We talk about it with Andrea Unger, 4-time world trading champion.
Welcome back! We're meeting today on this digital stage to talk about trading. So, what is the scope of our chat with today's guest? The scope is to steer the listener away from the false myths about trading and towards the so-called systematic method.
What do people who approach the world of trading for the first time ask themselves? In other words, what do they expect?
So many questions are asked. For example, does trading really mean doing risky and speculative operations? And also, is trading only for shrewd traders capable of tolerating even very high risks? And also, does trading mean sitting in front of a platform and doing dozens and dozens of trades per minute?
The truth is that these are false beliefs and distorted information that, by the way, often lead many people to rely on non-professional traders – or even real crooks - to perform trading transactions.
As in all professional fields, obviously everything depends on the level of expertise. Today, we're going to focus on the systematic trading method, a method that enables us to make preliminary and upstream evaluations.
The question is why do we need to do this work? Why do we need to use this method? Well, as we said previously, trading is generally perceived by the masses in two ways: a scam or a quick and easy way to make money, and neither of the two versions is true.
The tools to operate in a professional manner in this field, removing the wrong or distorted information that often influences it, are provided by Andrea Unger, the only person to have won 4 times the World Trading Championship in the Futures category. Andrea, welcome back!
Thanks Debora, nice to see you again and hello everyone.
Andrea, now let's talk about trading considered a rather risky way to stay on the market. Many people believe that trading on financial markets actually exposes you to a lot of risk. In your opinion, why do people think this is the case? It is obvious that a person who does not know anything about financial markets tries to be careful because when something is unknown, you must be careful and use the right tools as if you were sailing on a stormy sea. But why is trading considered so risky?
There have been many stories, even public, of people who have ruined themselves with the stock market, so that's already scary, isn't it? The fluctuations are in front of everyone's eyes, so when there are black days on the Stock Exchange, "lost X billions" and so on, it is scary. So, trading is seen as a very dangerous world.
Even banking professionals often discourage people from DIY stock market trading by "scaring" the client with fairly tragic tales of what might happen. And they're not wrong! Obviously, they do it because that is how they propose their regulated investment products. But I can't blame them for that either.
But it is risky, and it is depicted as risky, because in fact it is risky. But, how risky? It is risky if one approaches it without any prior knowledge of the facts, or with the belief that a few notions are enough to familiarize oneself with it.
I don't fly an airplane just because someone told me that it isn't so difficult, that all you need are two buttons and a lever and you're off. There is no one in the air anyway, so it doesn't matter. If I were to do this, I'd probably crash causing considerable harm to myself and others.
But if I were convinced then I would jump in, and people are convinced that after all it isn't difficult. There are people who tell us that. The brokers, the platforms, they explain the approach to the Stock Exchange in a simple way.
But if from a technical point of view it is simple to know which buttons to push and how to place a buy and sell order, how to structure the platform.... All of this, even if this is simple, what really needs to be simple is understanding what you' re doing. Why am I buying this? Why am I selling that? And once I'm in it, what am I going to do? What will my intentions be once I've bought.?
All of this... people don't ask these questions. People buy because someone told them to buy because it will go up, and then they are at the mercy of events. And when you're at the mercy of events you know, you may end up being charged 8€ for the Yellow Pages. I don't know, it's just an extreme example!
"And wait! It'll go back up anyway!" There are various false myths such as "as long as you don't sell, you haven't lost", "don't worry, it'll go up again", "the stock market will always go up", "the stop loss is what makes you lose". All these phrases invented by someone, who then usually says you know,them acting like they know what they're talking about, as if they were an expert, a person with experience, leads to disasters that then become "it's dangerous".
Yes, it's dangerous if you don't know what you're doing. But if you study what you're doing and make a game plan knowing (which is the most important thing) what risks you're taking, like: by doing this, how much can I lose? Then I’ll decide if the amount I can lose is okay with me or not. But it's a hypothesis that you definitely need to consider.
The loss, the risk of losing is the starting point of every trade that you're going to make. What am I risking? I'm talking about all the risks. Then one will categorize them, this is riskier, this is more likely, this is less likely.... So, starting from the failure of the broker (so the risk of losing all the money I have with that broker) to every single operation. I want to enter here, I want to exit here because at this point, I'm convinced that the trade was wrong. Okay, how much do I lose in this adverse movement, if it occurs? Do I lose €1000? Is it okay for me to lose €1,000? Am I willing to lose it knowing that I can lose another €1,000 tomorrow, the day after tomorrow, and so on? Or do I jump off the bridge later? Then, if someone says "I'll jump off the bridge but I really don't think I'll lose €1000" then clearly he' s making a mistake.
Because the risk exists, the rare cases do occur, and so you must start with a thorough analysis of what might happen and decide whether or not you' re ready for it. If you're ready, great. If you're afraid, it's better to forget about it because if you make a game plan beforehand, you have to stick to it.
If your game plan contemplates a certain number of risks to be taken, then you must continue to accept them later because otherwise you'll mess up. But I assure you that when a person is "in a mess", and he starts to feel sick to his stomach, all the decisions made become big question marks. And that's when you run the risk of making a mess.
I've been trading on the stock market for more than twenty years and (I must admit) I still mess up. And that is, although I have automated systems, experience to spare and I've seen it all, even today I still have days when I have doubts about what I'm doing, the game plan that I've made, the system that's running.
Doubts related only to my emotions, if there is something that isn't going the way I'd like it to go, at this point too much is too much. I start to find myself in difficulty. And then you risk pressing the wrong button and doing more damage than you could possibly do.
Another very harmful thing to those who approach the stock market is to earn money. It seems a strange thing but I'll explain it better. There are several people who are veterans of the not-so-distant 2020 that found themselves by chance or for available time (due to closures and lockdowns of everything that was openable) to have the opportunity to place orders, to play in that case on the Stock exchange, and there was a period in which wherever you touched, you were earning.
Well, these people today probably believe they're a modern-day Warren Buffett. "I did so-and-so and made money like crazy." Yes, look it worked because there were special conditions at that time.... "Eh but you..." Well, they think they're smart, and usually that leads to getting hurt. I don't want to jinx anyone, for Heaven's sake, and then someone will say I threw it at them, but that's how it is. When someone thinks he’s very talented afterwards.... Like when you get into a car, maybe you'll avoid an accident by an inch, you think you're the new Niki Lauda, you start driving like a madman and then you crash, you drive into the first ditch. The same thing can, unfortunately, happen on the financial market.
Andrea, we previously mentioned your international awards: you're the world trading champion for your operations on the Futures market. These are a very particular tool, because these instruments can anticipate the price trend of certain assets. This leads me to ask you the following question: does the riskiness of trading also depend on the type of instrument you trade? Let me explain better, I am a novice, I've never done any trading but, of course, considering all the recommendations you've just given us, I know what my risk tolerance is, I know that I must invest a certain amount of money in these operations and that I must be willing to lose that money, but obviously, being a beginner, I wonder if trading an Italian stock instead of a foreign and complicated currency would be less risky? Or is the level of risk the same for all types of investments?
I'll give you an answer that always gets my wife upset: it depends. So, there's been a lot of news reports about municipalities, if I'm not mistaken, or public entities that had invested in derivatives and lost a lot of public money. And there was a politician who attacked derivatives as the mother of all evils. And the futures you were talking about are just derivatives, but that doesn't make them any more dangerous than Eni, Enel or whatever. They are not so dangerous as far as I know their characteristics.
Every derivative has numbers, values that distinguish it: a weight, a height, an eye color. If I know what I'm talking about and what I'm using, at that point I know what will happen to me if I work with that instrument. That's it.
Think of leverage, for example. It's okay that you can use leverage on futures, but that doesn't mean you have to use that leverage to expose yourself more than what your available capital is.
Derivatives are dangerous when one uses them because if you have little money, you want to maximize your exposure. So you go either on Forex, which in this case is the currency market, where there is leverage, or on derivatives, precisely the classic futures, because there you can move much higher amounts with less money margin.
And that's a problem because yes, I can move higher amounts but when the operation goes against me, I’ll also suffer greater losses. So, if I trade on the Dax future market, for example, and I know perfectly well that entering where I want to enter and exiting, in case I am wrong, at this point, I'll lose the previously mentioned €1,000 with a contract, knowing that I don't want to lose more than €3,000, I'll buy at most 3 contracts. I won't buy 10 just because I have enough money to buy 10. Because if I bought 10, I would lose €1,000 in each operation, and that would make me lose €10,000. And that would be too much knowing that I don't want to lose more than 3,000.... So, I should buy only 3.
So, if I always start from the concept of the highest permissible loss for me, for my budget, and for my psychology, I can, knowing the instrument, calibrate on each the position I'll open, the size of the position.
At this point, you say, "then it's easy!". No! It depends… There are also instruments that are more exotic than the exotics. These instruments have low liquidity, which means that there are few traders working in those markets. If we compare the Mini S&P 500 future and the Orange Juice future, there are huge differences in terms of contracts available on the market. On the Mini S&P 500 I'll always and in any case find a way out at the price I want, or at least close to it. On the Orange Juice future market, instead - and I don't want to demonize it, but obviously it is an example of a not very liquid market… Okay, the orange juice is liquid, but not as a market....13:43 But there's the risk that if there is a sudden movement due to a news item or something, it'll get out of hand because I can't find a counterpart to sell my contract to.
So, it's better to opt for markets that have a certain number of players, and in which there are enough contracts available not to be left holding the bag. So exotic yes, but not too much, there are few people and others are often smarter than me, then better to stay out.
This is a simple but very effective suggestion. Let's take the first prudent steps, perhaps with a liquid instrument that, when the time comes to disinvest, it can be done fairly quickly because there is an efficient market that responds.
Before we say goodbye, here's a last service announcement. For all the people who'd like to delve deeper into the concepts we have explored during our conversation, you can order Andrea Unger's book, "The Unger Method," which is available on the Unger Academy website. You'll receive the book at your doorstep. It's free, and you only cover the shipping costs: so happy reading, everybody!
Need More Help? Book Your FREE Strategy Session With Our Team Today!
We’ll help you map out a plan to fix the problems in your trading and get you to the next level. Answer a few questions on our application and then choose a time that works for you.BOOK YOUR FREE STRATEGY SESSION NOW >>
Andrea Unger here and I help retail traders to improve their trading, scientifically. I went from being a cog in the machine in a multinational company to the only 4-Time World Trading Champion in a little more than 10 years.
I've been a professional trader since 2001 and in 2008 I became World Champion using just 4 automated trading systems.
In 2015 I founded Unger Academy, where I teach my method of developing effecting trading strategies: a scientific, replicable and universal method, based on numbers and statistics, not hunches, which led me and my students to become Champions again and again.
Now I'm here to help you learn how to develop your own strategies, autonomously. This channel will help you improve your trading, know the markets better, and apply the scientific method to financial markets.
Becoming a trader is harder than you think, but if you have passion, will, and sufficient capital, you'll learn how to code and develop effective strategies, manage risk, and diversify a portfolio of trading systems to greatly improve your chances of becoming successful.