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

TRADER EXPECTATIONS

Traders who have recently made the decision to give this profession a try possess the innocence of excitement that is only paralleled by watching a child getting candy. The idea of working in your pajamas, quitting your job, telling your boss goodbye, and having money print out of your trading platform is just too rich a dream to pass up. That initial high diminishes after the first weeks when one realizes the complexity of educational and psychological challenges that come with trading. Traders expect to be winners, and some expect to win on every trade. After all, that is why they are taking the trade. Of course, some know it will work since they are (sarcastically) expert market predictors.

The pro trader takes that energy, focuses on more reasonable expectations, and has the patience to ride out the numerical quirks of market uncertainty and randomness. Pro traders are much more flexible in their expectations. Expectations on any given day or week are nonexistent since the random sample is too small. It's impossible to predict what the next five trades will result in when a statistical sample may need to have 150 trades completed prior to being considered valid.

Having reasonable expectations, you eliminate any thought of what to expect, thus taking your focus off the emotional risks in being right. The only expectation one should have after a trade is that there will be a positive outcome, a neutral outcome, or a negative outcome. As discussed earlier, ...