Does your trading risk management decision–making change as a risk event gets closer?

the thinkerFirst step ..lets define  risk event ….

A risk event is a point in time/price that you should take some action and by not adhering to that you are putting yourself at greater risk of either not attaining the profit you can get or sustaining a greater loss than you should on any one particular trade.

As traders we are taught to pre-determine our exit strategy prior to entering a trade and many follow through on this confidently and will draw the appropriate line in the sand theoretically and position size their trade accordingly.

BUT… when it comes to push the exit button they fail and see that potentially small loss turn into a capital destroying large one. Let call this investor group A.

OK so that’s at least half of the trading population covered..what about the other 50%

Well, they pre-determine their exit strategy prior to entering a trade and many follow through on this confidently and will draw the appropriate line in the sand and position size their trade accordingly. Yet when it comes to CLOSE TO THE TIME they should push the exit button they do prematurely and subsequently see the price move up once again. Let call this investor group B.

So what is going on, how does that well thought out plan of action turn into an emotional mess of procrastination, inept behaviour and money-losing nonsense with the Goalpost changing that we are describing?
It seems that the closer a risk event is the less likely we are to remain tight to our original plan. So, bottom line as a risk event comes close, something occurs (an emotional state invariably) to alter our thinking and so behaviour.

 

I guess it shouldn’t be surprising really that we see this in our trading as we see this time and time again in life. We may know the benefits of eating well and avoiding behaviours that may harm our health but it often takes a health problem and the risks associated with that to change our emotional state sufficiently to take action

So accepting that the issue of the proximity of risk is a real potential demon we may have to battle, what can we put in place to minimise the mind-bending impact of this particularly damaging relative of the trading devil that sits on your shoulder?

Let us first assume that you ARE actually pre-determining your exit..if not that is your start point!!

Now to action once you have got that nailed….
a. Count the number of times you are doing this versus the times you are doing what you should…lets really get down to the truth of the problem! Own it! Great traders are ALWAYS honest traders about where they are and what they are doing!
b. Gather evidence of the impact when you have succumbed to the quiet voices (or sometimes damn noisy) of doubt at the button pressing stage versus the times when you have managed to follow through. ..you know you wont change without the evidence you need to!
c. Aim for 1 month (oh c’mon yes you can do a month) where you absolutely, totally adhere to what you say you are going to do at the start of a trade…more evidence gathering

 

Move forward with POWER..!!

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