Trading Risk Summary

Let’s really take a look at what risk is. Risk is the possibility of loss or injury, something that seems dangerous to us. Risk is uncertain, it is unpredictable. When you define trading risk, you are calculating the probability of a stock going up versus that of it going down. This is very useful because it allows you to weigh how much trading risk you are willing to take against the possibility of a gain in light of the uncertainty. It is essential to be willing to assume trading risk in order to achieve the desired result of profits.

Setting Goals

A great way handle the uncertainty in the markets is to set future oriented goals for yourself and then develop a trading strategy or trading system that will allow you to achieve that result. It is essential that you stay aligned with your goals and trading strategies; by doing this, you help to eliminate some of the uncertainty and make the risk more manageable and definable.

What Is An Appropriate Level Of Risk?

It is difficult at times to draw a line between prudent risk and thoughtless risk. This will require considerable practice, preferably through paper trading. Also, you should work at gaining a better understanding of the company you are dealing with by performing fundamental analysis and technical analysis, and finally control your own psychological contribution to the process.

If you are too risk averse, or “trading scared”, you will not have the stomach to hold your winning positions long enough to realize the potential profits that you expect. Conversely, if you are an action junkie and risk too much, you may get into a game of taking huge draw-downs and that can psychologically wear on your brain over the trading day. With concentration, you can learn to tolerate the uncertainty and ride out the uncomfortable feeling that a drawdown presents. After some time, you will begin to trade in the “zone”, a mind set of action, focusing on the here and now, without dwelling on your past mistakes or emotions. This will allow you to take proper levels of risk, balance and size your trading risk, and tolerate the uncertain nature of the risk.

Know Who You Are As A Trader

If you can get in touch with your core being, you can then shape your trading without any preconceptions at all. That is the key to success, to be liquid and adjust to different market environments without the ego and the hard hat.

Many traders say that the psychology of risk is the psychology of confidence. Confidence means knowing how to trade in all situations and this comes with practice and patience. If you get that feeling in your gut that you are “gambling”, you are probably not confident. Confidence comes from time-tested consistent gains. Be patient and follow your trading plan and confidence will naturally come. In your core, you know that a week or two of gains doesn’t make you a professional. Be honest with yourself.

Taking risk and conquering market uncertainty requires you to be on the cutting edge, learn new skills, and stick to your trading plan even in the face of difficulty. Drop your ego, allow yourself to be coached by others with experience. Do not be afraid to ask questions and don’t feel the need to be in control all the time. The best traders that I have seen are humble, resilient, and always looking to better their trading skills so that they can remain grounded and objective in handling their risk.

Additionally, taking risk and eliminating market uncertainty requires a trader to work on not getting distracted, augmentative, or even too opinionated. Be able to get smaller in trade size when your trades are going against you. Don’t allow your ego to play a big role in your trading activities by holding losing positions way longer than you should be, risking disaster. Be liquid and allow yourself to increase your skill set and learn new concepts.

Action Plan

I find that you can ask yourself a few questions to keep yourself honest and better understand your trading style. Think of a few recent trades that you made, review the stock chart and ask yourself the following:

• What price did you enter the trade?
• Did you add additional shares as the stock went in your favor?
• Where did you sell out?
• Can you correlate your trading style to the manner in which you managed the trade?
• Did you buy shares near the bottom and then add more as the stock went up? Or did you buy and sell quickly once you landed a small profit?
• What lessons can you learn about your trading style from the way you managed this trade?
• How would others have traded this stock chart? What do you need to do in order to grow your trading style and the amount of risk you are willing to assume?
• What is holding you back from doing this?
• What is a sticking point for you that is preventing you to reach that next level; something that you have trouble with because it creates much anxiety and uncertainty?
• Do you have trouble buying/shorting more shares even when you are very confident that you are right? This line of questioning should help you understand who you are as a trader and what steps you need to take to improve your trading risk profile.