EMBRACE TRADING RISK is the mantra I espouse to all traders, mainly because the universal law of duality exists. This law states that nothing can exist without its antithetical counterpart. Night cannot be without day, evil cannot exist without good and rewards cannot happen without risk. I know this may be a bit philosophical for some readers, but it’s amazing to me how many new traders truly don’t understand this law of nature. I can make this statement due to the number of people I see who are on a perpetual search for that elusive “Holy Grail” of trading systems. You know, the one that offers big profits with little effort, and no risk. Of course, I’m being facetious, but you’d be surprised how many people actually believe there’s a way to trade without risk.
It would be logical to assume that everyone looking to get involved in trading understands that trading is risky, so embracing trading risk would be a given. In fact, when asked, most students at the Academy acknowledge that they are willing to assume some degree of risk or else they would not be involved in financial speculation. However, when we begin discussing trading set-ups, those same students that assured me that they didn’t have a problem taking losses begin asking questions like, “How do I know if it will hold the supply or demand level?” or “What if it doesn’t hold?” Another one of my favorites is, “What do you use for confirmation?” To which I reply, “I put on the trade and let it work or fail. Confirmation happens if the trade works.” This answer always seems to elicit a puzzled look.
Now in their defense, many traders have been conditioned to look for confirmation. A large number of new traders seek out multiple technical indicators, searching for multiple layers of assurances for their trades. The problem I see with this is that by the time all the stars line up (so to speak) these traders are usually entering the trade too late, which in turn increases their trading risk. The inability to pull the trigger when an opportunity presents itself is directly attributable to the self-doubt generated when one does not TRULY ACCEPT THE RISK on the trade.
Let’s delve into this notion of unconditionally accepting losses as part of trading which, in my humble opinion, is one of the biggest obstacles for most traders to overcome. It goes without saying that we never put on a trade expecting to lose, but most traders do place a stop loss just in case the trade doesn’t work. Yet, when price approaches the stop level the natural tendency for the NON-PROFESSIONAL trader is to move the stop away from the market in hopes that the market will recover. The next adjustment, in an effort to avoid losing, is to pull the stop altogether, or worse, double-down on the position.
Moreover, when a trade initially goes against the non-professional and then recovers to a break-even level, this trader will close out the trade relieved he didn’t lose money. Invariably and more often than not, as soon as he exits the trade goes on to hit the target causing the trader to lament his bad decision. Regrettably, this begins a vicious cycle of negativity in the trader’s mindset. This cycle can only be broken by gaining confidence in a methodology and coming to terms with accepting risk and understanding the random principle of trading. So, you see, placing a hard stop does not necessarily endow a trader with the “risk taker” attribute.
In class I encourage students to think in terms of risk versus reward as well as probabilities. A trader must find an edge. The professional trader will put on his trades in a systematic fashion without FEAR of losing or being wrong. He sees every trade as only one in a series of hundreds or possibly thousands that he will take. This is thinking in the aggregate instead of putting too much emphasis on each individual trade which is the aforementioned random principle.
I understand this is much easier said than done, and it will probably take some work to modify thinking in this manner. Those traders who can’t overcome their fear of losing will always operate in an environment full of stress and anxiety. Sure, they’ll have their ups and downs, but at some point trading will become drudgery and not much fun. Then again, for those of you that truly want to take your trading to the next level and experience the satisfaction of seeing a rising equity curve over months and years, the next time you spot an opportunity, define your trading risk, put on the trade without hesitation or doubt and let the chips fall where they may. After all, what’s the worst that can happen? You might lose a few bucks, or perhaps the trade works and your profit target is achieved. Mathematically speaking, if your profits exceed your losses by a margin of better than five -to-one, and you have a win/loss percentage of 50% or higher, your chances of being profitable overall are excellent. That’s provided you accept the outcome on every trade. In other words, you must truly EMBRACE RISK, and understand the universal law of duality in order to achieve your trading goals.
Until next time, I hope everyone has a great week.