Kindly also share your thoughts on Risk aversion and risk acceptance.
The whole question of risk management is far from an objective subject. You need at least one subjective piece of the puzzle to put it together, and that is an individual’s acceptance to risk. Now that is subjective, meaning there is no rule that says how risk averse you should be. That is an integral part of your emotional makeup.
The problem is, human nature does not operate to maximize gain, but rather to maximize the chance of gain, i.e., maximize the number of winning trades, and minimize the number of losing trades. The result is, not only is risk controlled, but profitability is also controlled. In other words, playing it safe can be just as bad as taking too much risk, because you are not optimizing your winning trades nor the days with extended ranges. Sure, it's possible to develop trading idea based on very short-term price swings that will on average be profitable. However, the average profits on individual trades from such methodologies are microscopic, and the trades they generate are so many that it not reasonable to scale up these strategies. If we look at it from a modern portfolio theory point of view, we can think of the trading profit on any given trade, as the compensation we receive for the risk we took on the trade. In a sense, the market demands a premium from the trader for taking less risk, which is of course, reduced profitability
Ultimately, it is not what the trader knows, but who he is. The really profitable traders are able to ignore or weaken their natural tendencies to do what feels comfortable, and instead, do what is essential, to be profitable.
If we don't take a chance, we won't get hurt, but on the other hand, we'll never know what could have been. On top of that, if we don't take risk after risk, by making trade after trade, we will never sharpen our trading skills, and we will never become a winning trader. So when we face risks and possible losses, it’s wise to not despair about it.
Let me leave this topic with these three quotes –
1. People who look for easy money invariable pay for the privilege of proving conclusively that it cannot be found on this earth - Jesse Livermore
2. Even though most people think they are trying to succeed, they are simply going through the motions. The last thing in the world they want is to get off the familiar treadmill and actually get somewhere - Chin-Ning Chu author of "Thick Face, Black Heart"
3. A Ship in Harbor Is Safe, But that Is Not What Ships Are Built For – John Shedd
Some people are profitable mostly everyday. If not everyday surely by every 2/3 weeks. These people just take salaries from market like a job.
Does trying to emulate something like that result in risk aversion? Is it possible to be playing it too safe, avoid being underwater for more than a few days/weeks and come out profitable consistently.
To be honest with you, am yet to see a trader making money every day or every week. It does not mean that they don’t exist but they sure does not come and chest-thump in public forums. If they do, we are looking at a seasoned salesman and not a trader
The need for steady money like a weekly paycheck will unhinge our thinking and force us to deviate from our plan of action that was so well thought out prior to the start of the trading day.
Please do remember the following points about profitable (albeit consistently) traders –
1. Consistently profitable traders do not care about anything or anyone’s opinions of what the market will or might do. They never watch what other traders do as they are independent in making their trading decisions. They don’t carry the notion if someone is trading longer than themselves, they should be naturally smarter (this is the most absurd thinking of newbie traders)
2.Another common gangrene of newbie traders is that they don't like to give money back to the market, so they decide to try and modify the system to filter out trades like that last losing one. They begin to add indicators to charts, coming up with more longwinded combinations, frantically testing to see what removes the worst signals while leaving in place the positive trades. A few times round this loop and their chart starts to resemble like a 2 year old drawing on the wall. Consistent traders never jump systems or modify their system for every losing month.
3. It is common for many traders to set high expectations about themselves and their performance in trading. When the expectations are not met, they beat themselves up mentally and get stressed out. In turn, they are subjecting themselves to make trading errors. Losses start to mount, and their mood worsens. Soon, they find themselves in a deep psychological drawdown. You can't just snap out of it. It will take a lot of extra effort and psychological resilience to get back up to par and (only few ever come out of it successfully). This high expectation creeps into our mind in two ways – either through internal stimulus (we set it) or through external stimuli like other people’s so called ‘claimed’ performance. What is the best way to solve 50% of this problem? Stop comparing our performance with others. I am so itching right now to give a suitable ‘adults-only’ analogy for this high expectation issue but restraining myself as this is a public forum
4. Trading is not like riding a bicycle, in the sense that, once we get over the threshold of learning how to ride, we’re finished. There are various stages of profitability a trader must go through, each one requiring different technical and emotional skills. The trader first has to get to the point in his profitability where he can overcome transaction costs and all the negative emotions that subvert a novice trader, so that he consistently breaks even. The next level of profitability, is when a trader can actually support himself (and his family), through his trading profits. Accordingly, the bar for his emotional skill-set must be raised, because trading is now his livelihood. Not only are the pressures of trading still there, but the everyday pressures of life are now ubiquitous. And last, is the level where we’re trading to make optimal (as much money as we can make, given the amount of capital you are working with) money. Only, you can go through all these stages for you and nobody can.
Please do not expend your energy on ‘performance’ comparisons.
So Lemondew - market is just like life, It is never going to make anything worthwhile, easy. There is always going to be a price or a premium to pay. Instant gratification comes at a cost, and the price you pay is the lack of a long-term payoff. Forget about those ‘super traders’ (99% of the times, he/she is just trying to sell you something) and put in a little effort up front in the planning stages, and then relax/just follow your plan to the letter. Thinking too much can damage your trading, not to mention your stress levels!!
Thanks for posting this question. I truly mean it. It is surprising that nobody has any serious question on the topics am posting (except on money mgmt.). Maybe, it is not invigorating anybody’s mind (the primary intention of the member-only thread). This is why I requested a feedback from you all (to change the approach) but that also came out empty
As someone said - "A prudent question is one-half of wisdom."