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
Trading is difficult. It tests the bounds of your abilities. And if you don’t carefully manage your risk, the results of a poor decision could be devastating. You must ensure that you are prepared to trade before you risk your pride or your money in order to survive. Without the right attitude or tools, you wouldn’t attempt to climb Mount Everest, so why try to trade when you’re not ready? It’s best to avoid the marketplaces until you are fully prepared until you are rested, at ease, and well-equipped. Here are some fundamental things to think about before you start trading seriously.
Before the markets start, it’s vital to do some research and restrict your trading options. Since they have traded the same vehicles for years, some seasoned traders may argue that they don’t need to prepare for the markets, but it’s crucial that new traders understand the value of planning ahead. Knowing your specific trading vehicles before you enter the markets is a sign of good preparation. It’s helpful to choose precisely what you will exchange because there are so many options that it can be overwhelming.
If you limit your emphasis to a few key deals, you’ll discover that you’ll make more money. (Trading every opportunity is not necessary to be profitable, and attempting to do so may frequently overwhelm you to the point where you won’t make any trades.) Not to mention creating and following a thorough trading plan. Make sure you take into account every last detail (for example, entry strategy, exit strategy, and risk control). Don’t put off developing your trading plan until the last minute. Get ready early.
It’s crucial to prepare for any potential negative forces that can work against your trading strategy. Just like a mountain climber must prepare for terrible weather, traders must prepare for situations that could adversely affect market behaviour. Make sure, for instance, that you have taken into account key market occurrences like interest rate changes, earnings reports, mergers and acquisitions, or the status of ongoing legal processes. These events can quickly ruin your trading strategy because the general public is often persuaded by them. So be on the lookout for them and be prepared to adjust your plans if you do.
Be sure to psychologically prepare yourself. Trading is hectic, demanding, and emotionally draining. In order to vigilantly attend to the numerous sources of incoming information necessary to take swift and decisive action, your mind must be operating at full speed. You must practise having the appropriate frame of mind. Make sure that significant stressors don’t enter your consciousness. In your free time, deal with pressures and settle old disputes. Don’t undervalue the impact that these psychological influences may have on your perspective. They may obstruct your immediate experience as you put on trades if you don’t take care of them beforehand.
The need to prepare physically is equally crucial. It’s crucial to keep in mind that even though you might spend the most of your day sitting in front of a computer screen, this somewhat sedentary activity nevertheless requires physical stamina. You’ll have a tendency to act impulsively if you don’t have the physical stamina to carefully monitor your trades since you’ll be too exhausted to keep up with the fast-paced activities. Make sure you receive the appropriate nourishment and activity. You’ll not only increase your physical endurance to handle the demands of trading, but you’ll also release tension. Trading is difficult. Exercise on a regular basis helps to prevent the buildup of stressful feelings.