Don't Avoid Risk - Accept It.
The first step to trading well.
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Now, to the article ☕
Just because you trade, doesn't mean you've accepted the risks involved.
This is a concept that many people don't seem to understand. They think that because they've taken a trade, that they've internalized the risks of the trade. But that can't be further from the truth.
Think about all the times when you felt fear when the trade moved against you, or despair when you didn't adhere to your stop losses and suffered a far greater drawdown. Or that time when you didn't take profit and round-tripped your positions.
And now months later, in the depths of the bear market, you find yourself still thinking about that time when you didn't take profits - why?
It's because you haven't accepted the risks involved! If you had, you would have been able to make peace with these outcomes relatively quickly.
We cannot prevent ourselves from feeling emotions - we're only human. But what we can do is move on from these situations - when someone dies, we grieve and mourn, but continue our living our lives.
But as traders, we can't seem to move on after putting on a bad trade - it haunts us like a bad dream. After putting on a series of bad trades, the trader will believe himself to be incapable of placing a good trade - and thus, he'll only see the negativity in the charts.
His bias and fear will blind him from seeing the objective information that the market is pushing out. And like a self-fulfilling prophecy, his next trade fails yet again.
And so, to become traders capable of putting on the best trades without fail, we must all learn to accept risk.
What Does Risk Acceptance Look Like?
You're on a plane, and halfway through the pilot announces that it's about to crash. Everyone around you is panicking - they don't want to die after all. But you? You're in your seat, calm and collected, awaiting what happens next.
That's what risk acceptance looks like. Obviously, my example is a little extreme, but it paints the picture. You know the risks when you boarded the plane - but just because you boarded it doesn't mean you've accepted it.
Accepting it means internalizing the worst-case outcome, and being alright with it. Look deep into your heart and ask yourself - are you ok with losing all the money that you're trading with?
If the answer is no, then you know what to do - trade with a smaller amount. Do anything that will make you accept the risk.
Only then will you be able to start trading objectively. You'll be able to overcome the failures of your past trades, and not let them cloud your mind. I can guarantee that you'll feel like a new person after this - at least, I did.
I also wrote about "The Lethal Mistakes Every Trader Makes" - and I believe a big part of avoiding this mistake is to be able to accept risk.
The Lethal Mistake Every Trader Makes | Exit Liquidity by Kyle
The market isn't biased, but you are
Concluding Thoughts
I came across this topic when I read this quote:
In trading, the goal is not to avoid risk - it's to manage it.
It was short but extremely profound. I found myself questioning my relationship with risk, and asked myself a few key questions:
What is risk?
What does it mean to accept risk?
Am I a risk taker?
These conversations with yourself really help you to understand the topic at a deeper level, and understand yourself as a trader.
If I've at least managed to help one of you foster a better relationship with risk, then I'll have done my job as a teacher.
Till next time
- Kyle