Trading Lessons I’ve Picked Up on the Journey – Accepting Risk
Jan 10, 2020 Trading Blog
My journey in trading just hit year 20. I was one of the masses who gave up a real job in the internet bubble of 2000 to chase digital riches in the market. I succeeded greatly and failed greatly during that time, and also failed for several years after that period due to all the psychological damage I suffered and bad habits I picked up in those roller coaster years. I’ve recently started writing down many of the issues I’ve been through over the years and figured maybe it would help someone just getting started. Good trading karma, you know?
Probably the biggest mistake or issue that I’ve had in trading over the years was the inability to accept risk. I’ve tried to avoid risk, outsmart risk and eliminate risk. I’ve tried to structure it out of my trading and even tried to eliminate the risk averting emotions like fear and greed, but I can definitely say none of that works. The only way you can succeed in trading is to simply accept risk and learn to live with it, to make it your friend. Without risk there can be no reward. Without risk, there is no trading game.
Specifically, the risk of each individual trade has to be accepted before the trade is ever placed. I know it sounds so simple, but it never was for me. I would place a trade without defining my stop, which was basically ignoring risk. I would place a trade without a profit target, which was both ignoring the absolute amount of risk and the cost of that risk. Once in the trade, I would micromanage it because I couldn’t handle the risk. I’d either let the trade run past my stop (ignoring risk), cut it early before it hit the stop (escaping further risk) or cut it at breakeven if my prayers were answered after an initial adverse move (escaping further risk). I would take positions that were way too small so that I could avoid risk. I’d cut winners short because I didn’t want to risk the small profit I was up. All of these issues existed because the initial risk of loss wasn’t fully defined or accepted BEFORE the trade was taken. I’ve seen it likened to buying a lottery ticket. You pay the clerk $5 and get your ticket, the money then belongs to the store. That’s accepting the risk of a $5 loss. I always wanted to get my ticket first, scratch some of it off and see a few numbers, then decide if I wanted to accept the risk and give the clerk $5.
All these mistakes of ignoring stops, micromanaging trades, cutting winners early, cutting losers too early and not letting trades work were all a result of not fully accepting the risk. It’s a single mistake that shows up in many ways. At some point, I decided that once I found the trade I wanted, I simply considered the money lost. I love poker, and much like poker, once you push that money to the middle of the table, it’s no longer yours. It’s the same with trading. When you enter that trade, you have pushed your money to the middle of the table. It’s resolved with a profit target or a stop loss, either your cards win or they don’t. Once you have accepted the risk of loss and that the money is no longer yours, you can let the trade work. You are then totally free. There’s no fear of loss, because you have already accepted the loss before the trade is ever made. Without that fear, there’s no impulse to micromanage, no impulse to cut the trade short and no impulse to ignore the stop. It probably seems like the most common sense thing in the world, but it just never occurred to me that this was a problem of mine. I thought I was just being careful and prudent, protecting my capital as all the “gurus” said to do. But I wasn’t, I was costing myself huge with grinding losses, as well as the occasional big loss when stops were ignored.
The constant fear of risk would also wreak havoc on my emotional state. Once I entered the trade, I saw nothing except information that would support my trade. My biases went absolutely crazy because I hadn’t accepted the risk and I was living in constant fear. When your mind is obsessed and being influenced by fear, you can’t see the true market. I would miss every danger signal the market offered and every opportunity that those signals could have presented.
So why was accepting risk so difficult? I can only speak for myself, but most of my problem was likely because I grew up not having much money and even as an adult I was pretty cheap. If you come from the same kind of background, you know what I mean. When you don’t have much money, you do everything you can to protect it. My parents always stressed saving and never being frivolous with money. Those childhood lessons stuck and unfortunately those lessons just don’t mesh with trading. To me, that $100 trading loss was losing a night out or some nice clothes, but in trading you just can’t think that way.
Money in trading, much like poker, is just a tool. It’s not cash or clothes or nights out. It’s capital that you use to make your product, which in our business just happens to be more cash. I had to stop thinking of money in the ways I had always been taught as a kid. It kind of gets to the point where you just have to lose respect for money. It’s not that you don’t care about it, but you just have to see it in a different light, not as money, but as a capital tool in your business. Like they say, losing money in trading is just the cost of doing business and until you can view it like that, you will always fear risk. And as long as you fear risk, your brain will never be free to do what is necessary to trade.
Another factor for me was that I jumped right into trading after quitting a job where I was making decent money. Risking money meant risking being a failure and having to crawl back to my old job. From an early age we are taught as kids that failure is bad and should be avoided at all costs. Even as an adult, you experience the same thing because you don’t want to be seen as a failure by your friends or spouse. If you don’t risk, then you can’t fail. At least that was my thinking at the time. If I could only find a way to avoid risk and be profitable in trading, then I had it made. In my mind, if I just avoided risk then there was no way I could fail! I just didn’t know the game well enough to realize that this thinking was so hilariously far from the truth. Sometimes you just don’t know what you don’t know.
Everyone has a different view of risk. The views above were specific to me. If you are having any of the trading problems that I mentioned above, then you should take some time and really explore what risk means to you and why you might be avoiding it. There are probably as many reasons for avoiding risk as there are traders. Until you define risk and realize how and why it affects you, then you haven’t truly made friends with it.
One other quick thing on accepting risk: Always make sure you are getting paid enough to accept the risk. Always know the profit potential associated with the risk you are taking. You can accept all the risk you want, but if you aren’t being compensated enough to accept that risk, you will lose in the long run. For many people, accepting risk becomes easier if they are getting paid more to accept it. Accepting a $100 risk is easier to do if you are getting paid $500 to do it. Always know the R multiple (Reward:Risk) of every trade you take. And be realistic in your assessment. Dreaming of big profits that aren’t realistic won’t work, if anything, be conservative in your profit potential.
As much as I tried, I never could eliminate risk or the associated emotions. And believe me, I tried everything. It just isn’t possible, nor is it recommended. You just have to accept risk and learn to live with it. Once you accept risk, so many emotions dissipate and mistakes disappear. A feeling of freedom takes the place of that risk fear and you are free to trade your method with 100% of your brainpower. It’s really the only way.
More next week. Hope you guys had a great week trading and I’ll post this week’s review and next week’s trading plan on Sunday. Have a great weekend.