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
Experienced traders usually talk about times when they are performing at their best. Trading in the zone or “flowing with the markets” are two names for it. But the defining traits are a careless, emotionless demeanour and a concentrated, determined concentration on the markets. In this perfect mental state, traders almost completely forget about themselves. They are simply paying attention to the current process as it is happening. They do not feel self-conscious, worry about how they are performing, or fear performing poorly. Everything just seems to “click” as they float along with the market’s ups and downs. The majority of traders concur that in order to trade profitably, one must be in a peak performance mental state.
resolve interpersonal disputes. Not everyone who trades has issues at home that need to be resolved. However, if you have a tendency to carry “unfinished business” around with you, it will constantly be on your mind, preventing you from achieving your top performance. The need for self-esteem, the need to validate one’s worth, the drive to be correct, or the urge to feel superior to others are a few examples of common psychological problems.
Many traders ignore these problems, believing they are nothing more than psychobabble. That doesn’t apply to me, they reason. It could not apply, but individuals with these kinds of problems are frequently lured to trading. Ironically, it is these conflicts that motivate them to seek a demanding trading career in which they must overcome huge difficulties to join the elite group of people who earn large salaries in comparison to the great majority. Make sure you don’t actually have psychological conflicts that prevent you from reaching your top performance condition before you decide to ignore these problems.
Consider probabilities when thinking. Mark Douglas writes about a “thinking strategy” he calls “thinking in terms of probability” in his book “Trading in the Zone.” In other words, a trader shouldn’t concentrate on the result of a particular trade. Instead, he or she should concentrate exclusively on the whole picture, the result as it relates to all traders. When it comes to trading, you should enter the market with the expectation that you will lose more transactions than you will win. However, mathematically, with the use of effective risk management, it is still feasible to turn a profit across a number of trades, even if most of them are losers. It’s a good idea to not overreact to defeats. Put things in their correct context.
According to Douglas, it’s helpful to think of trading in the same manner that a successful professional gambler thinks of gambling. Professional gamblers approach the game with objectivity; they lay wager after wager in the belief that, if they make enough trades, the law of big numbers will favour them. A similar “thinking style” should be used by traders. A trading strategy with a track record of success is a crucial requirement. However, once you have it, you must use it often to benefit from this successful track record. Giving the trading method a chance to succeed over a number of trades can help you repeat the past odds of success even if it does fail a few times.
Implement sound risk management. A crucial element of trading at optimal efficiency is careful risk management. You will experience tension whether you are aware of it or not if there is a genuine threat that you will lose substantial sums of money or money that you just cannot afford to lose. However, if you set a risk limit for each deal, you will subconsciously understand that you have little to lose. And when you are confident that even the worst-case situation poses little risk, you will feel less emotional and have an easier time reaching your peak performance condition.
Trade according to a very specific trading plan. The most important factor in reaching optimal performance is probably having a meticulously thought-out trading strategy. Completely describe the strategy, including the particular entry and departure locations as well as the market circumstances that must exist for it to be used. There will always be room for indecision if every element of the plan isn’t laid out, which will keep you from operating at your best. Make your preparations ahead of time, not when you are trading. When you are attempting to make unneeded last-minute judgments, it is too difficult to maintain objectivity. You can maintain focus and trade at the top of your game if you plan out your approach as much as you can.
Many traders think that being mentally at your best while trading is essential to doing so profitably. Not everyone has a natural predisposition for this ideal state of mind, but with the correct preparation and practise, anyone may achieve it. The time spent learning how to do it is worthwhile.