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
There are basically two ways to comprehend and interpret occurrences in one’s life, according to renowned psychologist Dr. Julian Rotter: Either one can assign the reason to internal factors, like hard work, aptitude, or ability, or one can ascribe the cause to external forces, like luck or fate. One tends to assume full and complete responsibility for an outcome when one searches for internal forces. One may remark, “I made a profit on the trade because I was well-prepared, patiently awaited the perfect indications, then traded my plan,” as an example. That is a justification that relies on internal factors.
For a winning trade, it’s easy to explain the outcome with internal forces. We have a natural tendency to build ourselves up and enhance our ego when we win, so it makes us feel good when we do well and believe it is due to our talents and skills. But what about a losing trade? When we lose, it’s also due to our talents and skills, but in this case, it may be a lack of talent and skills. Such a possibility is harder to accept. When faced with a defeat, most people suddenly switch from looking for internal forces to looking for external forces: “The market conditions changed too quickly.
Once more, price manipulation is being done by market makers. I should not have followed that analyst’s ignorant advise. I had bad luck. When a loss occurs, it is simpler to make an excuse than to accept complete responsibility. During these times, the majority of us have a tendency to view the world from a self-serving perspective, attributing our successes to intrinsic personal traits while attributing our failures to environmental factors. But there are benefits to going against our natural inclinations and constantly accepting full responsibility for both our victories and failures: One feels powerful and in total control.
Participants who tended to attribute life outcomes to internal forces, such as the psychological advice we offer in these Innerworth daily columns, were found to be more satisfied and able to apply the self-help information to change their lives than participants who tended to look for external explanations, according to a study on self-help instruction. They were able to apply the self-help advice to them more readily, which gave them a sense of empowerment and control over their life. By embracing accountability for one’s actions, it is possible to take complete charge of one’s life and implement significant changes.
All energy is concentrated on improving performance and learning new skills rather than always searching for justifications and attempting to lay blame on external circumstances. Contrarily, traders who don’t accept full responsibility often focus a large portion of their psychological energy on defending themselves against their errors. They tend to be readily influenced due to a constant need to maintain their egos rather than building an accurate, impartial picture of the markets. Focusing on external factors for failures may make one feel better in the moment, but it will ultimately have a negative impact on performance. Over time, abilities stagnate and scarce psychological resources are wasted on ego-protection. To identify an outside cause for failure needs effort and time.
It can be challenging to accept complete responsibility, especially after an unsuccessful trade. Looking at one’s flaws and limitations is difficult. However, the long-term benefits outweigh the momentary discomfort felt while considering one’s restrictions. You will ultimately obtain power and control if you examine your shortcomings, accept accountability for them, and accept complete responsibility. So assume complete accountability and exercise control.