Risk Management in Trading

Trading psychology is a broad term that encompasses the study of traders and their emotional issues about trading. Trading-psychology literature takes its cues from scientific study of psychology, common sense, and the experience of traders and trading gurus.

If you are interested in trading psychology, it probably means that you are further along in your trading education. If you are one of the traders with an interest in trading psychology, you have moved beyond looking for the perfect trading system. You now understand the important
role emotions play in trading results.

One thing that many traders fail to recognize is the intricate relationship between what you risk and the emotions you experience during trading. In fact, risk and trading psychology are two sides of the same coin.


Every battle is won before it is ever fought —Sun-Tzu

Some would say your lot in life has been decided. The ending balance of your account is already known. If this were the case, would you like to know who knows this number? Why not ask this
person now to find out if you should spend so much of your time trading? Who knows what your final balance will be? Who is this person who can tell you what the future holds? Who knows how
much money you will make (or lose) due to your trading?

You! This person is you! You are the one who knows whether you will make money or not, even though you may not have conscious access to this information. Most traders do not acknowledge this fact: Your beliefs drive your behaviors.

This includes your trading behaviors. If you believe you are worthy of trading profits, you will be able to make money. If you do not believe your trading will lead to profits, you will not be able to
consistently make money. It doesn’t matter if you decide to work in business or in trading. Your beliefs, whether they are accessible to you consciously, will drive your behaviors.

This is exactly why people who win the lottery end up broke a few years later. This is a very common story. Perhaps you heard about these people. Once they win the lottery, things should
change for these lucky winners, but, in fact, it just delays the inevitable result. The end result is, of course, no money

Why You Win (or Lose)

You win (or lose) because of your beliefs. Specifically, of course I am talking about your winning or losing in the financial game. It does not matter if you are an entrepreneur, looking at establishing a new business, or if you are a salesman, looking to cultivate a stream of customers, or, perhaps
more likely, if you are a burgeoning trader, looking to establish reliable trading method to pull profits from the market.

The same principles apply to all people looking to make money. Your beliefs about money, and how
worthy you believe you are of money will determine whether or not you make money trading.
Perhaps you don’t agree. Perhaps you believe that you only need a good trading system in order to find a trading success. If that is the case, then why is it that one profitable trading system may
be offered to 10 people, and those 10 people will have varying degrees of success?

There are some excellent trading systems in this book. However, not everyone reading this book will take these trading systems and go forward and make money. Why is this the case?
If you believe you are worthy of trading profits you will find they come much more easily. If, however, you believe you do not deserve trading profits, you may never find a trading system
that works for you. The most critical aspect of your trading system is you.

Your Money Attitudes

Your beliefs about money can determine how much money comes your way. If you believe money is good and you are worthy of wealth, money is more likely to come your way. However, perhaps
you believe something different; perhaps you believe that rich people are selfish. Maybe you think that most wealthy people found wealth through immoral behaviors.

If you think wealthy people are unethical, you are unlikely to desire to become wealthy. Some traders believe wealthy people are nefarious, and thus these traders are unlikely to ever achieve real wealth. Why should they become wealthy if wealthy people are despicable. Other traders think that rich people simply make loads of money because rich people are very motivated to … make money.

These traders are much more likely to join the wealthy crowd. Seeing yourself making money is the first step to trading success. If you believe wealthy people are moral and good, you are more likely to become one of these people. Likewise, if you know that you will be making money, if you are confident that you have the skills to achieve wealth, you are on your way to becoming wealthy.

There are very few laws for trading, but this is one of them: Improper risk management leads to emotional trading problems. Win or lose, if you risk too much on a trade, you will endure emotional problems. It is not only with the losing trades that improper risk management rears its head.

Improper risk management

Risking too much on a trade leads to emotional issues, even if the trade is successful. If too much risk is placed in a trade and it ends up a winner, overconfidence, irrational exuberance, and sloppy trade execution may be the result. If too much risk is placed in a trade that ends up being a loser, any number of results may occur: trading rules may be ignored, psychological despair may result, and the management of the trade will almost always be exceptionally poor.

There is no way around this law of trading

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