Here’s a paradox for you. The more you resist losing, the more you fear losing, the more you try not to lose, the worse you are likely to do in trading.
Conversely, the more you are willing to lose, and the more often, chances are the better you will do.
Sounds strange, I know, but in today’s highly competitive markets the obvious guidelines are usually worth-less, and often simply wrong.
As traders, our goal is to make money, but in order to accomplish that feat, we need to take on risk, not avoid it. In the quasi-Newtonian world of price dynamics, RISK is the equal and opposite force coupled with REWARD. No risk, no reward.
THE ILLUSION OF SAFETY
An agenda to avoid losses is often a thinly disguised agenda to avoid RISK. In that fantasy scenario, we try to seek out ‘safe’ trades, but is there really such a thing? Usually, the trades that look the safest in hindsight felt downright dangerous in real time. And trades that seem ‘safe’ in real time are often illusions of hindsight.
Hindsight is deceptive because it eliminates the uncertainty factor (RISK) from our analysis. When we subtract RISK from the trading equation (it happens automatically when we study cold charts) we become geniuses in our own mind and we fool ourselves into thinking that RISK can and should be avoided.
DNA OR CONDITIONING?
Some people are naturally risk averse due to genetics. You can tell by looking at your daily habits. For instance, genetically risk averse individuals pay bills on time (or early) and fill their gas tank well before the warning light comes on. Naturally risk averse individuals do better trading instruments with built-in hedging, such as options.
For many traders, however, risk aversion is a consequence of excessive losses or a perfectionist mindset. In either case, it is not a trading methodology that will guide you to profits. On the contrary, risk averse traders tend to be breakeven traders or worse.
Embracing risk and planning for a possible loss is the better tactic.
[Dr. Reid is a trading coach. Please feel free to share your comments or ask a question to him below.]
