It’s well known that the only thing you can really control in trading is the amount of risk you take. But can we accept the risk we take?
Managing risk is basically a technical matter: you can use a stop order, you can hedge with an option, or the size of the option position itself is the limited risk. This is fine so far, it can be learned and applied nicely.
But most people have not yet accepted the risk itself, either mentally or emotionally. And that’s where the problems start…
The emotional side of risk
Just because the risk is technically managed doesn’t automatically mean that it’s accepted.
How do you know if you have accepted it?
It’s very simple: if I am emotionally twitching, stressed, unable to think about anything but the position, then I can be sure that I have not really accepted the risk. Then only the technical risk management has happened, but not the emotional, psychological and mental acceptance of it.
The emotional acceptance of risk is related to several things:
- what the loss means to me,
- what it means if my wealth is temporarily reduced,
- whether I have taken full responsibility for my decision or whether I am blindly following others (in which case I can blame them),
- if I lose, does it reduce my own “value” in my eyes,
- whether I accept that I cannot foresee the outcome of a position,
- accept that a loss is not necessarily a mistake, but an inherent part of trading.
- It is worth reflecting on the above if looking at losing positions is emotionally upsetting.
Individual trader development
The emotional, psychological, and mental acceptance of loss is part of the trader’s individual development. It cannot be avoided, it cannot be escaped. It has to be worked through. For some it takes years because they may have learned as a child that they cannot make mistakes, that they have to be perfect and that losing is not part of that. But those who trade have to let go of these messages from their parents.
It may sound very cliché, but the way to get there is through self-awareness. The trader needs to see what childhood patterns, limiting beliefs and programmes are driving him.
If he does not work on this, the absolute acceptance of risk may either never happen, or may be so prolonged that he is prematurely out of the game.