I read a book on trading many years ago that said before every trading day begins, you must ask yourself: How badly can I screw up my account today? It sounded a bit blunt, and an odd way to start the morning. But I've found this simple approach is a great way to focus on the key element that will determines long-term success in any asset market, stocks, bonds, commodities, currencies, and even real estate -- it's risk.

When you think of risk, you probably think of things such as:

• Emerging market crises brewing
• Potential time-bomb of derivatives
• The stock market overvalued
• U.S.-China trade war
• On and on into infinitum...

No doubt these are market risks. And they do create fear and lose. But there's nothing we can do about those risks. We can neither keep them from happening, nor forecast them. But you can control your individual account risk -- the micro stuff.

It's obvious some of us can handle more risk than others. The best single phrase about how much investment risk one should take on comes from J.P. Morgan when he told a friend who was worried about his stock holdings, "sell down to your sleeping point." If you're lying awake at night, worrying about your investments, you are carrying too much risk.

I have found the simple "screw up your account" mantra very useful for risk control, so much so that I have it printed across the top of my "trade sheets" i.e. a piece of paper I use to record each of my trades, risk levels, and reasons for the trade. Why does it help me? It helps because it forces me to define the level of risk I will take BEFORE I enter an investment position -- I quantify it. And the reason I have capitalized BEFORE is this: BEFORE you enter the investment you still have at least a degree of objectivity left in your brain. AFTER you enter an investment position, your objectivity is flushed down the drain and replaced with something very dangerous -- hope.

Here's an example of what I do when defining my risk in a currency trade before hand...

I look for a key technical level...some type of chart support area, or basic trend line that will tell me that the dynamics of supply and demand in the market have changed, or put another way, if prices go to this level I am wrong -- the market has proven me wrong. I will exit there with a loss, no matter what -- period end of story. I can always reenter the trade if it makes sense. And because I have exited, I again regain that modicum of objectivity to better evaluate. Always remember, being in cash IS an investment position; and it's often the best position.

There is an old market adage: Bull markets climb a wall of worry, while bear markets flow down a river of hope. It's natural to hope our losses will subside and be afraid our profits will go away. It's why we are tricked by Mr. Market. It was legendary Wall Street trader Jesse Livermore who summed it up best, when he talked about reversing our natural impulses in the market:

When the market goes against you, you hope that every day will be the last day - and you lose more than you should had you not listened to hope. And when the market goes your way, you become fearful that the next day will take away your profit and you get out - too soon. The successful trader has to fight these two deep-seated instincts."

We must turn hope and fear inside out. We must fear our loses will get bigger and cut them short, which is what defining risk beforehand does for you, and hope that your profits get bigger and let them run; that's a topic for another day.

Jack Crooks
Black Swan Capital