Five Things You Can Do to Take Smart Risks

10/12/2009 10:43 am EST

Focus: STRATEGIES

Doug Hirschhorn

CEO, DrDoug.com

For now, the market really has no idea which direction it's headed. Is it a bull, or is it a bear? Are we set to take off, test new lows, or stay flat for the foreseeable future?

The truth is, people always speculate, but no one knows for sure what's going to happen. And that's why it's a market.

Here are five things you can do to take smart risk in uncertain situations:

1. Look inside yourself and pay attention to what you feel. Our bodies are hardwired to sense things before we fully understand why. Call it intuition, instinct, or whatever you want, but we all have it. The point is, in a game where uncertainty is the status quo, the best indicator you have is your gut. Trust it.

2. Trust the markets. Have faith, yes, faith. The markets will continually present you with opportunities to make great trades. If you trust this, then you won't rush into or out of trades because of fear.

3. Recognize fear. Look for fear in the market's behavior (over-selling or over-buying). Over-selling means people are afraid to take big losses. Over-buying means people are afraid they are going to miss out on profits. Once you know what over-selling and over-buying look like, you want to either avoid it if you're not in the market, ride it out if you're already in the market, or fade it if you're looking to get into the market.

4. Trade to make money, not to be right. If you want show people how smart you are, teach at a university or write a book. If you want to make money, do more of what the market is paying and less of what it's not.

5. Love to take a loss. Yes, losses are your friend, not the enemy. Losses, like profits, are a necessary and essential part of the trading game. After all, even the best traders on the Street have a winning percentage of about 50%, so relax.

Trading really is a game of probabilities, not perfection. Put these five things in place and you can take smarter risks in uncertain markets.

Think better, invest smarter.

By Doug Hirschhorn of DrDoug.com

Related Articles on STRATEGIES