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
A little-known commerce company has just been launched by Rohan and Himanshu. I sense it, Rohan declares. We’re going to get rich quick. We’ll be flush with cash by this time next year. Himanshu responds, “I don’t think so. That need a miracle. You’re such a pessimist, Rohan remarks. Why are you so depressing? Himanshu asserts, “I believe we will succeed. However, I don’t believe it will happen immediately. It will require patience and a great deal of effort! The realism Rohan is. He is aware that they will eventually earn enormous profits, but he does not hold out hope that a miracle will take place. You will have to overcome countless obstacles if you want to become a successful trader.
Although optimism is necessary, realism is perhaps more crucial. Overly pessimistic people, like Rohan, set themselves up for failure. You can take unneeded risks or feel especially let down when you experience the seemingly constant disappointments that come with trading.
If you want to outperform the market and become a successful trader, you must persevere through numerous disappointments and make trade after trade. To be able to get back up after falling and be eager to tackle each obstacle requires a particular kind of person. Dr. Martin Seligman has conducted research on how optimism encourages people to persevere in the face of obstacles. For instance, optimists outperform pessimists in terms of academic performance, electoral success, and professional success. Optimists outperform pessimists in all of the occupational groups he’s researched, from elite winning athletes to traders on the trading floor.
What is their trick? It’s in the way they justify failures or setbacks. The blame is not placed on them. They don’t think that enduring personality attributes determine success or failure. Instead, they justify defeats as the product of unimportant, manageable circumstances that are unrelated to them individually. They think they can overcome a setback if they are persistent enough. A positive way of thinking is something you must practise if you want to be a successful trader. As a trader, you will encounter far more losers than winners, therefore it will need perseverance to keep going until you discover a string of profitable transactions. But everything you do, avoid placing the responsibility on yourself. Think not, “I’m a loser.”
Instead, concentrate on how you can make a firm decision to alter both how you respond to and the external circumstances. You’ll advance considerably.
Despite this, being pessimistic has benefits. Despite having negative feelings the most of the time, studies have shown that pessimists are better at assessing their level of control over particular situations. Being occasionally pessimistic may be advantageous since pessimists tend to make more realistic judgements. While optimism may make you feel fantastic, pessimism allows you to assess whether your plans, objectives, or ideas are realistic. Traders are infamous for having excessive confidence, especially beginners. Terrance Odean, a behavioural economist, claims that new traders frequently overtrade and have overly high expectations.
Realistic expectations when it comes to trading are essential for survival. While optimism aids in overcoming obstacles, a healthy dose of scepticism will keep you grounded in reality. It can be helpful to reconsider your trading strategy before putting it into action, for instance. Have I considered every unfavourable circumstance that could undermine my plan? Have I properly controlled my risk? Do I have enough money to accomplish my financial goals? Have I allotted enough time to learn how to trade profitably?
Long-term survival depends on asking yourself these kinds of questions and making sure you have the answers. To become a successful trader, one must overcome a number of actual challenges. Sugarcoating the truth can only temporarily improve your mood. You’ll eventually come to realise the grim facts. The best course of action is to confront the challenges head-on rather than setting oneself up for failure. Making a realistic action plan with sub-plans to get around the seemingly infinite obstacles helps keep you grounded even if it initially seems overwhelming. You’ll be one of the select few traders who succeed in the long run since you’ll have an optimistic yet practical plan for turning into a successful trader.