Psychology and Risk Management
• What to expect
• Risks
• Position sizing
• illusion of control
• Accepting critisism
• Paralyzed by fear
• Loss is a feedback, not a failure
• The flexible trader
• Focusing on the positive
• Short straddle
• The dynamics of greed
• The herd mentality
• Notes
Have you ever been furious or frustrated without understanding why? Maybe you were simply keeping an eye on a position when the market abruptly changed direction, and when it did, you saw half of your potential profit disappear. An ordinary occurrence like this one would have been tolerated, but it wasn’t. You experienced threats, upset, and fear for an unknown reason. Without prior notice, it seemed as though a centrifuge of emotions grabbed over. It simply passed you by. You weren’t ready for it. You didn’t know why you were so horribly agitated, but all you knew was that you became disoriented and were unable to concentrate on sticking to your trading strategy. You were unable to think coherently. You were lost in a fog.
Why do we overreact when it’s not necessary? We often let our expectations dictate how we feel. We respond emotionally and impulsively when our expectations don’t line up with what really occurs in the markets. Although it’s in our nature to want to win, the markets aren’t always on our side. When we are taken off guard, our first instinct is to assume that the markets have been unfair to us. When something doesn’t go the way we expect it to, we become irate. However, trading is a career where you should operate under the premise that things won’t always go your way.
Even if certain trading events could not go your way, you shouldn’t let this aspect of trading depress you. A poor trade or an unexpected loss will depress you if you are caught off guard. But if you prepare for such things, you’ll remain composed and at ease, prepared to move swiftly to correct the issue.
It’s essential to prepare for bad things to happen rather than reacting emotionally and impulsively. Expecting things to go your way is unrealistic. If you think that something bad like this should never happen, you’ll be frustrated and angry when it does. Furthermore, you won’t be able to take significant action if you are too irate and frustrated. You won’t be able to react to potential issues right away.
You need to remain cool and consider how to take evasive action to protect yourself rather than getting upset, frustrated, or distracted. If you foresee a difficulty, you can calmly come up with a different solution and implement it.
Setbacks and unfortunate occurrences are a part of trading the markets, and without the right perspective, such setbacks may be crippling. The proper mindset is essential for traders. You won’t be mentally caught off guard if you actually expect disappointments and unfavourable circumstances. Instead, you’ll be able to recover fast, engage in fresh profitable transactions, and ultimately win out.