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

RISK ACCEPTANCE

Nearly every trader reaches a threshold where he or she is challenged to move toward the next level. They may be treading water or even mildly successful thanks to solid risk management and discipline. They start to increase their share size gradually, which starts to generate an increase in fear or other emotion that immobilizes them. What appeared to be mild risk-taking at a low share level now starts to be seen as taking bigger risks, even if they are implementing the same strategies as in the past with the same proportion of financial risk to their capital.

The best traders not only accept risk but thrive on it. They see risk as an opportunity, not a threat, and accept the uncertainty that accompanies every trade. Psychological risk is minimal since they know the numbers that provide them with the edge and are only concerned about execution compliance, not about the what-ifs about the trade not working. In the end, if you cannot accept the risk, you will avoid the risk. This is what most beginning traders do. What in essence they are doing is avoiding the golden opportunities provided by the market.

Expecting Loss

When we play games of chance in a casino, we tend not to express fear. The nature of casino games is that most of us expect to lose, and we hope that our entertainment value makes up for our expectation of loss. Also, the amount of monetary loss can be much less in placing a $5 chip on a blackjack table as opposed to the amount on a losing trade. When ...