Assessing Your Trading Risk Tolerance And Stretching Boundaries
By Terry Leslie
The basic concept of risk and reward is one that we all generally understand from the time we are kids. A high risk usually means a high payoff. A low risk usually means a low payoff. The most successful traders are able to determine their own tolerance for risk and move into the next boundary safely and effectively. It is an acquired skill, one that takes years to fully develop. If you are interested in stretching your risk tolerance boundaries, first you have to understand where your risk tolerance lies on the marginal scale.
When many novice traders start assessing risk, their high risk trades either haunt them until they finally sell too early just to find relief or they simply refuse to look at any trades that are risky in the first place. Risk is part of the game. We can all see the seasoned trader in our mind's eye, executing a high risk trade with the same confidence that he or she would execute a small surefire trade. That is partly because the seasoned trader knows that there is no such thing as a surefire trade. In fact, there is always something to lose and always something to gain. You have no control over the outcome, only your actions and reactions.
Assessing your own risk tolerance in part depends on your bank account but it also depends on what associations you are making in your mind. If you believe that there is greater value in who you are by executing winning trades, you aren't interested in devaluing yourself. If you believe that you are the same person with the same value in the world no matter what the outcome is, you will make riskier trades with more confidence while staying along the boundaries of your risk tolerance. Take your own value out of it. You are trading money, not your self worth.
Assessing risk tolerance might depend totally on your account balance. While this is entirely possible, it is rare. Most people have some sort of association with risk and outcome. Until we learn to let go completely of those things we can't control we have a difficult time reaching such conclusions. If it a matter of your bank account, then you have to start building slowly, which is most definitely going to test your patience from time to time. Start with a solid plan, determine percentages of winning trades that get fed back into the system and which percentages hold in your account ahead of time. Don't wait until you have to make the decision.
Everyone handles risks differently. There is no cure all for anxiety when it comes to taking risks and facing challenges. You may need to grow slowly in order to test waters before leaping or you may find that jumping into your most fearful trades works you through it faster. Whatever works for you is fine, provided that you are not allowing your fears to hold you back. Once you give into the possibility of fear and loss, you have already given into the trade. The market isn't there to help you or hurt you. It is just there. Using your own fears to prevent your own growth is counterproductive. Unfortunately, many of us don't even realize that we are doing such things to ourselves.
Assess your own style and take gradual stretches to continually grow. Small and continuous growth is equally effective as periods of standing still followed by a large leap forward. One step at a time, even if they are baby steps, gets most people through to their next risk tolerance boundary. Once you execute a trade, it is done. Losing sleep over it doesn't make the result any different, good or bad.
The number one reason why some traders never move beyond their risk tolerance stage is because they don't want to endure a loss. Nobody does. However, without the risk, you can't grow financially or emotionally. Of course losing isn't something that anyone wants to do, but if you're going to play the game then sometimes you are going to lose. This is a fact and not a personal attack. Once you make it personal, you will give into your own fears. Once you detach from loss, your will be able to move forward in the financial world and the personal development world.
Loss is not only part of trading, it is part of life. We can't go through this life with everything staying the same. Every now and then we lose a little, gain a little, and change a little. The same principles that help us get through loss in other areas of life are equally as effective when losing a trade. It is part of the big picture and has happened for a reason, usually to teach something that you need to know. If you can start to look at your losing trades as lessons and a quick and swift education instead of a personal attack, your losses aren't likely to devastate you any longer.
About the author
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