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
Be Flexible Enough
The ability to recognise when to avoid the markets is essential for survival. Sometimes it’s best to step back and wait for the appropriate opportunity. Both the financial environment and your psychological attitude are subject to change. It is a good idea to steer clear of traditions that are profitable when the market isn’t favourable for them. Even seasoned experts frequently need to take a step back and reconsider their strategies. Accepting your limitations, taking a break, and returning to the markets when you’re ready are not to be feared. There are numerous useful justifications for reserving judgement.
There are psychological justifications for refraining from trading. You may experience fatigue, depression, or general malaise on some days. You could find it difficult to retain the optimistic, detached mindset required for trading during these periods. Your psychological reserves may be drained, causing you to respond emotionally or impulsively. Some people can be tempted to place trades while they are going through a slump, but doing so could result in placing poor deal after bad transaction.
Your ego will suffer, in addition to your account balance. When you check your account balance the following day, when you are feeling better, you can still notice the effects of the slump. And on a day when you ordinarily feel relaxed, upbeat, and prepared to engage the markets in earnest, that can lead to emotions of worry. Generally speaking, it’s preferable to step back when you’re feeling low and start fresh when you’re feeling at your best.
When your trading strategy appears to be losing its competitive advantage, that’s another strong reason to avoid the markets. Any trading strategy has its limitations. Even a “foolproof” strategy can fail when market conditions shift. By carrying on with their trading, many inexperienced traders make the issue worse. When a technique fails, it can actually fail. With each trade, your account balance will decrease. Another error is losing your temper when your approach fails. It’s best to consider such circumstances as an intellectual challenge rather than a time for fear and self-doubt.
Experienced experts frequently claim that when their tried-and-true approach begins to fail and they must come up with a new one, they perform at their best. They see the predicament as a riddle that needs to be solved. They take a step back from the marketplace and carefully examine their procedures. They hunt for the method’s flaws and strive to fix it until it functions properly once more. When they believe they have found the answer, they do a few modest transactions to test out their new, updated strategy after looking for market factors that may have altered.
Therefore, discontinue trading at the same pace when your approach stops functioning. Remain outside, assess the situation, and wait until the circumstances are ideal before entering.
Monitoring both your psychological and market moods is necessary for profitable trading. It is recommended to avoid either one if trading is not possible and wait for the conditions to improve. Do not fall into the trap of believing that you should trade despite these potentially crippling conditions. You can continue trading another day when you’re in a top performance state and the market conditions are ideal by avoiding the markets today.