Stock Trading Insurance Policy

Trading Stocks or Forex is a risky venture. Don't you wish there was an insurance policy for Stock Trading?

Posted in Traders' Delusions, Submitted by Trading Critic on Wed, 2006-08-16 15:20.
Trading Stocks or Forex is a risky venture. Don't you wish there was an insurance policy for Stock Trading?

I recently went on a trip overseas, and as part of my preparation of going I bought travel insurance. Why did I buy travel insurance? Of course, to reduce my risk of financial loss as a result of any loss, sickness or misadventure. As a trader there are avenues to reducing your trading risk. There are many ways to reduce your risk when you trade. The simplest method is by limiting the amount of capital at stake. The next simplest is by utilising a stop loss, or better yet a guaranteed stop loss. If you want to hedge your position in some currency you can either use forwards or options. If you like to get your hands dirty, options can provide you with an advanced strategy to reduce your trading risk.

But this article isn't about stop losses or options. This is about insurance policies. As a trader, you are your own insurance agent, broker, investigator and claims officer. You have a Duty of Disclosure to yourself to know what your limits and abilities.

When you apply for an insurance policy you have the obligation to tell them everything you know so they can decide if you are an insurable risk, how much premium you will pay them as well as any special conditions. Is your trading risky? Is your trading an insurable risk?

Ponder these points before you go ahead investing your life savings and over leveraging your position. How much trading experience do you have? This should tell you what your trading capabilities are and what it is limited to. Ignorance is bliss when you first start out, I know from my own personal experience that I will never take such wild risks that I took in my first year of trading. If you are new to trading – it is the perfect opportunity to make the most mistakes. Think about how many times a baby has to fall before actually grasping the art of walking. If you never experience this in your first year or first few years, then you will find it harder to succeed in trading. Keep your leverage to reasonable levels and your trading simple – a baby doesn't jump, run or skip in the first day they try to walk.

If you're a hardened trader this is for you. The next assessment criteria in your insurance policy is whether or not your ever incurred any major losses in the last two to five years? (Or if you're impatient, which is never a good thing in the markets, 6 to 12 months) If you have incurred any large losses such as 50 percent or more of your capital at any time then you may be obliged to put yourself into temporary trading probation. When you make an insurance claim, your premium is pushed higher as a consequence. In this probation period you have a few options: to take a vacation from your trading to reflect on your losses as well as your trading as a while. You may want to paper trade (I personally don't believe in paper trading as it doesn't expose you to emotional stress - being one of the factos of failure in trading, but it may benefit you). You may want to trade with a reduced amount of money. You may want to take this opportunity to learn and master a new market – essentially exposing you to new situations, with you as a beginner again, free to make new mistakes. Losses are always a part of trading, and they must always be dealt with otherwise you can lose your hat (and your clothes and your house etc...).

It is your duty to yourself to disclose such information. You will find that with trading the markets, be it forex, stocks or options, you will learn more about yourself. You will learn how you react to pressure, stress and of course monetary loss and gain. You will learn how your emotions will fluctuate from each uptick and downtick and hopefully how to control your emotions (by instituting a well devised trading plan). Good Luck!

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