April 2012
Beginner
208 pages
6h 42m
English
book
The Risk of Trading: Mastering the Most Important Element in Financial Speculation
by Michael Toma
Content preview from The Risk of Trading: Mastering the Most Important Element in Financial Speculation
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CHAPTER 6
The Human Element: Psychological Risks of Trading
The emotional elements of trading are often undetected in basic trading plan reporting. Perhaps a comment such as “exited trade due to fear” or other abstract free-form text is often added to a journal and never reviewed again. The business model of trading in itself is relatively easy. We detect a pattern or indication that an edge exists and we push a button. However, when emotions such as fear and greed are present, it can be the most difficult task you will ever take on.
The beauty of trading is that we should be on the winning side given our discovered edge. We should not be afraid to lose because the probability and odds tell us that we should succeed. We should execute each trade as if it will adhere to the probabilities set out in our trade history. Fear is a great separator between expected results and actual results. It immobilizes the best of traders at times and prevents them from being successful. This fear of loss is a prominent risk in trading and is prevalent in nearly all aspects of the trading community. Like any other identified risk, we must run it through the risk management five-step process.
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