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

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RISK PARTICIPATION AND LOSS ACCEPTANCE

One of the reasons I suggest reducing the emphasis on keeping a Win-Loss column in your journal is because of the relatively small value the data provide in regard to identifying compliance risk. It serves as more of a satisfaction to those with hunger pains for the desire to win. Recall that the term “loss” is in our simple definition of risk. We define it simply as a chance of loss. In other words, when we accept risk, we in essence are accepting loss or at least the chance of loss in hopes of gain.

So why do traders often get frustrated when they lose? The primary answer is obvious: loss of capital. We also get frustrated because we simply do not want to lose. It is a characteristic of our being. A common element in my analysis of trade journals is the ratio of trades considered a win in proportion to those that have reached a predetermined target. Often, there may be reasons to take a trade off early, but a consistent pattern often denotes a desire to win or be “right.” The best traders aren't concerned about being right on any given trade. The challenge is that we chose a risk-filled business where we cannot control a lot of the activity being conducted while our money is at risk. We also cannot control the outcome. Traders are always between a rock and a hard place with their desire to be right, understanding the reality that often you will be wrong. By changing your definition of being right or winning, we strengthen our psychological ...

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