Worry about Risk, the Rewards Will Come... ?

"The primary goal of every trader must be to control and limit risk. If the risk of a trade is properly handled, the rewards will follow. "

-- Winning the Day Trading Game, Thomas L Busby,

Chapter 7 "Worry about Risk, the Rewards Will Come"

When I first read this statement, it sounded like a cliché.

I read it again... there seemed to be more to what it sounded.

I read it again... well, how can you defend your way to success?

Hm... sounds familiar...

In sports, great offence win you a game, great defence win you a title... a great striker win you a game, a great CB win you a season... 

Know what are the risk and what I might lose...

Brazil football team used to be known for their "offence is the greatest defence" philosophy. Even then, it involved risk management, i.e. they knew even if they conceded goals, they could score more to make it up. It's calculated. It's not reckless.

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Emotions!

"Whether you believe it or not, it is a fact. Many traders psychologically sabotage their trading and they do not even know it. They are not prepared for the flood of emotions that sweep over them when they are trading and, therefore, they are unable to deal with them. 

When the bank account balance is on the line, you will experience greed, fear, and denial. You will react in ways that you did not anticipate and, at least part of the time, you will take irrational and self-destructive action. In order to succeed as a trader you must prepare for the worst, just as a jet pilot must prepare for an engine failure. You must recognize the emotions that you will experience when you are in both winning trades and losing trades and you must be prepared to deal effectively with them. Design specific strategies for the market’s movements and be ready to execute those strategies when your emotions get fired up. If you do not recognize the power of emotions in trading and if you do not prepare yourself to effectively deal with them, you will fail. 

Do not destroy your next trade by worrying about and reliving your last one. If you plan to be a long-term player, there will be hundreds and maybe thousands of other trades."

-- Winning the Day Trading Game, Thomas L Busby,
Chapter 5 "There's No Crying in Trading"

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Be a Good Loser

"As weird as it sounds, learning how to lose is really learning how to win because we will all be losers at one time or another. You must know how to deal with losses so that they do not defeat you. Winning  traders put their bad days in perspective and keep on plugging away. They do not ignore their mistakes; they learn from them and get better and stronger."

"To be a winner you must learn from your losses and eliminate mistakes you have control over."

-- Winning the Day Trading Game, Thomas L Busby,
Chapter 5 "There's No Crying in Trading"

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The sinking feeling when averaging downs go south

Some familiar feelings when the market goes firmly in the opposite direction.

This method of trading is known as averaging down and, believe it or not, it is a method used by thousands of traders. In fact, it is a strategy that I used for years. 

I remember the last day that I used it. I was trading the S&P Futures. At that time I always placed my orders in thirds. I bought the first third of my contracts. The market immediately moved against me and I was losing money. Fear reared its ugly head but I refused to acknowledge it. I responded by buying another third of my position. The market continued to fall and I continued to lose. It was getting harder and harder to stay calm and keep panic from sabotaging my strategy. My palms were wet with sweat, but I stuck to my plan and I arrogantly bought my final third. My losses kept getting greater and greater. I was getting sick.

On this particular day, the bears were clearly in charge and the market continued to fall relentlessly. My losses were increasing every second, but I just held on and waited for the reversal that I was sure was coming. I would not give in to fear and I would stick to my original plan, no matter what. After all, I was a professional and I knew how to analyze the market, right? I just needed to give the market time and it would validate me. Just hold the position and wait. This was no longer a trade, this was a war. 

I waited for the market to shift and turn my way. I stared at the profit and loss box on the trading dome for what seemed like an eternity and I watched my losses increase as I sweated and my stomach flipped. My original arrogance gave way to fear and panic. I had not considered being wrong and I had no plan for dealing with the fear I was experiencing. I was immobilized. I felt like a pedestrian standing on a street corner watching an automobile headed straight for me, but I could not move to get out of the way. I was a sitting duck.

On that day, the market did not reverse and eventually my losses were so huge that the truth hit me and hit me hard. I could not deny it any longer. I was wrong! I had been a bull in a bear market and I could not buy my way out of my error. By adding to a losing position, I had only increased my losses and dug myself into a deeper hole. Those are the days you want to forget.

-- Winning the Day Trading Game, Thomas L Busby, pg 66 

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Three Most Destructive Emotional Forces in Trading

1. Greed
2. Fear
3. Arrogance

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The Four Fears in Trading

1. Being wrong
2. Losing money
3. Missing out
4. Leaving money on the table

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