Most traders have come across the standard risk disclaimers that decorate the footers and back pages of articles, websites and webinars. You will typically find language disclaiming any responsibility for the reader/customer’s trading results along with a reminder that trading is risky and one should only commit an amount of capital to one’s trading account that one is willing to lose.
I doubt very much that most traders take this warning seriously. Why?
Humans, and especially those of the male persuasion, have a bias called The Lake Wobegone Effect, which is the tendency to overestimate one’s own abilities. It is named after the fictional town created by Garrison Keillor, where “all the women are strong, all the men are good looking, and all the children are above average.”
Consequently, the decision process that men use to assign capital to a trading account tends to be colored by the unexamined assumption that the trader will be successful and that warnings about risk of loss do not really apply to him. Unfortunately, this sets up the naïve trader for a fall, because without mentally preparing for losses and ‘assuming’ them in advance, one will be shocked by the experience of one’s first serious drawdown.
This shock will be amplified many times over if the capital used for the trading account was actually savings, not risk capital. There’s a difference; a huge difference, but some people will overlook it.
If you want to learn more about your own risk perception, you can take a free Risk Profile at : http://www.daytradingpsychology.com/risk-profile/
