When ESC (Electronic Stability Control) detects loss of steering control, it automatically applies the brakes to help “steer” the vehicle where the driver intends to go. Braking is automatically applied to wheels individually, such as the outer front wheel to counter oversteer or the inner rear wheel to counter understeer. Some ESC systems also reduce engine power until control is regained. ESC does not improve a vehicle’s cornering performance; instead, it helps to minimize the loss of control. According to Insurance Institute for Highway Safety and the U.S. National Highway Traffic Safety Administration, one-third of fatal accidents could have been prevented by the technology.
So what does this have to do with trading? Everything!
Managing risk is key to being successful in the markets, regardless of the time-frame used, instrument traded or strategy employed. If you don’t manage risk you don’t last in this business. Did you notice that with ESC everything is automatic? That’s because when your car is out of control your mind races and rational decisions simply can’t be made.
Transfer that thinking to the markets. When you’re in a trade that is out of control and rational decisions regarding risk can’t be made. Is there something there to automatically step in to control/minimize the damage?
I’m not so much saying that your approach needs to be 100% mechanical but rather suggesting that the risk management side of it is in place before the need arises. Even then the decision still needs to be made to act and that is often where many fail in managing risk. Think about that for more than one second. The discretionary trader still has to act on the protection to avoid the loss of control in a trade. It takes discipline which is something many of us lack.
Trading is like a diet (more to come…)