The process of risk management of your trading system is not only based on mathematics, but also includes human psychology. It is just as important for profitability as the dynamics of the trading method. People experience fear, greed, high ego … and these things can hinder the process of trading with the right size of the position, reducing the loss and holding a winning position.
These are the dangers of not following your risk psychology:
(1.) Too strong faith in a trade can cause the trader to open too big a position because he expects “something to happen.” However, we must know that nothing is certain and the size of our positions must always coincide with the limits of our management’s risk.
(2.) Fear of loss may force the trader not to exit a position when the pre-set SL is reached and continue to hold positions of increasing loss while waiting for the “right exit” because the market may “turn around”. We should never rely on the fact that it is possible for the “market to turn around”, especially if we have opened a position against the trend and move SL in the hope that we will not have to close at a loss. If you are not ready to take a loss, it is better not to enter the market at all, because postponing the exit can lead to a much bigger loss.
(3.) The larger the size of the position, the harder it is to follow the trading plan. Trade at a position that is convenient for you, even if it is losing, so that you can stick to your plan.
(4.) The trader must assume that there is uncertainty in each trade and therefore he must be ready to react as well as develop it.
(5.) The ego can make traders forget their risk management rules because they think they know what will happen to the market. However, the truth is that they do not know and the first time they are mistaken they can pay with their account.
(6.) Fear of missing out (FOMO) or the fear of missing an opportunity can make a trader enter a position when it is not suitable for him price or under conditions that do not coincide with his strategy, just because there is a large influx of positions. This often results in missed entry, opening too high a price, misjudging the risk / reward ratio and possibly losing.
(7.) The fear of losing “kills” the good trades in its infancy. It often happens that people leave a profitable trade too early because they are afraid that they will close at a loss. It is better to get out of a position when we have good reasons and a real reason.
(8.) Trading plan is written when the market is closed so that you do not make emotional decisions during real trading. It is difficult to assess the risk as prices change every second and you miss good opportunities to enter because of an emotional approach. The trading plan will filter only the good inputs and will guide you what to do.
(9.) Often the ego is the reason we hold losing ground because we don’t want to admit that we made a mistake.
(10.) The trader must always believe in his skills and strategy in order not to execute his trades with unnecessary stress. Stress leads to mistakes and deviations from our principles. Therefore, risk management serves to limit such deviations from our strategy.
(11.) Good trading psychology means to follow our strategy in a disciplined manner and with adaptability to the changing market conditions.
(12.) The trader must have the discipline to overcome his fear and greed and follow his way of trading, which will bring him profitability. Most traders fail to make money because they can’t control themselves, they want to control the market. They fail to exclude their ego, greed and fear from their trade and make bad risk-managing decisions.
Junior Trader Kameliya Ivanova