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 important to maintain your attention on the trade you have placed. You must be ready to quickly take action to protect yourself when you can clearly see the signals that the market is moving against you. However, psychological problems like self-doubt, shaky confidence, or a lack of dedication might divert you. They might affect your capacity to easily carry out your trading strategy and handle a trade. It’s helpful to try to resolve as many psychological conflicts as you can, even though it’s practically impossible to eradicate all psychological conflicts from your psyche. This will prevent psychological conflicts from penetrating your consciousness and interfering with your ability to concentrate on your trade.
It’s best to deal with psychological conflicts as soon as possible because if you don’t, they just linger in the background of your mind and consume precious, finite psychological energy. You can lessen the likelihood that psychological problems will enter your consciousness when you least expect them by identifying them before the trading day. Do you harbour any unsolved disputes in the back of your head? It’s challenging to simply ignore these disagreements entirely and carry on as if nothing ever happened. Ironically, the more psychological energy you expend trying to deny that these problems really exist. It’s better to acknowledge and deal with disputes than to try to ignore them.
There are some issues that all merchants must deal with at some point, even if you are not the type of person who has a lot of old disputes to settle. There are several trading myths that have some basis in reality but are challenging to embrace. For instance, new traders need to be aware of and prepare for the potential that a string of profitable deals may have been the consequence of luck rather than trading talent. Even if it feeds our egos to believe we are amazing traders, it is preferable to admit that we might not be as talented as we would want to be than to act as though we are something we are not.
Since it requires more mental effort to pretend that you have trading skills that you don’t, it is preferable to just acknowledge the problem and take steps to address it. For instance, one can improve their talents, gain more trading knowledge and experience, and become a top trader.
Some traders might be reluctant to accept similar thoughts, but they should. Perhaps I was a good trader once, but the market conditions have changed, and I may not be able to live up to my expectations of trading profitably, for instance, a trader might think. This scenario could arise at any time for traders. It might be true or it might be untrue, but regardless of its veracity, holding onto a belief like that requires mental effort. It’s preferable to be aware of the possibility, and if it’s true, take the required actions to disprove it. If it’s false, remind yourself that it’s absurd.
There are still a lot of psychological issues lingering in your thoughts. They are there, underneath your consciousness, waiting to pounce. When you are feeling weak, as when you are afraid or dissatisfied, these beliefs may come to the fore. Ignoring these potentially disruptive psychological problems is not helpful. It’s preferable to acknowledge them right away. When you do, you will probably be better able to tell yourself, “That might be true, but it doesn’t matter right now.” Then you had better spend some time handling it during your “off hours.” Your capacity to concentrate on your trade can be severely impacted by internal conflicts.