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
It’s Easier to Face Fear than Avoid It
Rohan imagines himself as a successful trader. He fantasises of winning big and accumulating a tonne of money. He imagines in the back of his mind that if he were wealthy, he could live in luxury and with distinction. Sounds recognisable? Face and fear, Many beginning traders are lured to trading to realise their dreams of financial success. It is normal to want money. Humanity has spent generations chasing success and money. According to common wisdom among seasoned traders, those who are humble and only seek to enjoy trading will ultimately succeed since trading itself delivers intrinsic benefits that are satisfying in and of itself.
Nevertheless, trading can be extremely boring at times. Day after day, month after month, traders must make trade after transaction. When something needs to be done repeatedly, even the most enjoyable activities start to lose some of their charm. In addition, one has to support themselves. You won’t be able to survive if your profits are insufficient to cover your losses. The concern of blowing out or becoming burnt out is a real one that most traders have. It is extremely likely that you will lose your edge and blow out. You won’t be able to trade in the end.
The notion that it is simpler to avoid facing the unpleasant than to face it head-on is a prevalent irrational one. However, we experience more anxiety and terror when we foresee an imminent catastrophe than when we courageously and resolutely face an unpleasant reality. Making plans is preferable to waiting for a tragedy to occur. And if you ignore the potential that you could easily burn out or blow out without taking preventative measures, that is exactly what you are doing. In both situations, taking a definite stance on the issue will help you save time and effort.
As a new trader, Face and fear likely that you’ll lose your entire account balance unless you establish reliable trading methods and gather enough market experience to know when they’ll work and when they won’t. Making it seem impossible will only make matters worse. It is crucial to follow these two steps: Limit your risk exposure on every one deal, and have a backup plan in place just in case you blow your account. You’ll have a better chance of surviving the learning curve if you limit your risk. A realistic recovery strategy should also be in place in case you are unable to overcome the learning curve.
The key message is that disaster prevention efforts must be proactive rather than waiting for one to happen. For instance, many traders engage in day after day of trading without receiving enough rest and relaxation. Some people think that in order to keep ahead of the competition, it is important to trade every day. The issue is that everyone has a finite amount of energy. It is essential to frequently rest, and if required, to take extended breaks. Burnout cannot be avoided by acting like you are a superhero when you are not. You must take pauses from trading, even if they span months or years, to avoid burning out.