The Risk of Trading: Mastering the Most Important Element in Financial Speculation

THE RISK OF REGRET

Regret risk is a similar exposure where you seek to take profits prior to a set and known target or if you hold onto a trade seeking additional profits only to see price reverse direction. It is important to understand that in both cases you are losing. In the first case it is the opportunity cost of not holding to the historically optimal target. In the second, you are losing profits that should have been taken at the known target. From a trader's perspective, he or she may not see either as a loss since both can be recorded as a win in the trade journal. From the risk manager's eyes, both are losses to some degree and more importantly, plan violations.

Traders are not superheroes. We are not psychics nor are we perfectionists. All we have is a plan, and our role is to implement that plan. Traders are paid to make the best decisions with the most accurate data available that exposes edge in the markets. We need to be experts not in actual trading but in the ability to analyze situations using statistics. Many a successful trader's foundation is based on these ideas. When the human element comes into play, the purity of the above principles becomes diluted and is replaced by many forms of psychological risks. In this chapter we will discuss several risks, including the inability to accept loss and risk associated with using improper share size, and steps on how you can master each of them.