3 Simple Rules of Psychological Risk Management

22 ต.ค. 2022

In trading, psychological traps lie in wait for us at every corner, it is a revenge trade or an irrepressible attempt to win back. To help ourselves, we need an analogue of money management, only from the psychological point of view. It is created and adapted to ourselves, that's why I will describe my variant:

1.Stop trading for a few hours/days after 2-3 unsuccessful trades in a row.
2.Then 1-2 positive trades on a demo account or chart.
3.Return to real trading.

The rules are simple. They are also extremely effective. But you have no idea how difficult it is for most people to follow them.

Unbearably anxious to get back lost money
What does a beginner who has lost money in three or four unsuccessful trades in a row do? Ask yourself, what will you do?
You are hurt, mentally bad from the loss of money. You're already short of it, and you've lost even more. It's suffocating, it's such a nasty, disgusting feeling. How do you get rid of it, quickly? Immediately, right now?

That's right it’s REVENGE TRADE. You start taking the trading as a game. Now tell me this: you've been wrong three times in a row. You don't understand the market phase. What makes you think your next trades will be successful? How do you know? You're not sure. You're just emotionally unhappy. The child inside you is crying and wants his toy back. You want the numbers back on the deposit. That's all your motivation. The only chance of salvation in this situation is to stop, to stop this psychological masochism and strictly forbid yourself to lose even more.
If you can’t do this then the market has won. Professionals know how to deal with losses. Amateurs do not.

Psychological Stop Loss.
When the price goes against your forecast and reaches a certain level, the trade is closed. That's it. You are in a loss. Having lost a part of the capital, you have saved the rest. After 2-3 losses in a row, you need to stop.

Most do not know how to do this. But this is what distinguishes a professional from a beginner. A pro knows that everyone loses in the market. Always. Even if you have 10 years’ experience, you still lose money, you just learn to accept it and use your skills to make more money than you lost. That's the job of the market professional to pull the mathematical expectation of the trades in your favor. Losses are always followed by profits, losses again, and so on in a circle. And if you are losing, it is important to make the losing streak stop.

A psychological stop loss gives you that opportunity. After 2 to 3 failures in a row you:
- Stop trading for at least a few hours.
- Stay away from the chart for a couple of hours, to calm down emotionally
- Take apart your mistakes and put them in a trader's diary.
- After a few hours make some forecasts by the chart
- and only after 1-2 successful predictions in a row you switch to the real capital.

This is a universal, powerful rule. But it's hard to follow because you have to accept the loss. However, you have no chance of doing that if you haven't learned to accept the simple fact that you are not smarter than the market and losses will happen regularly.
You can come up with your own variations, but stopping a trade (psychological stop loss) is a must, without exception. That's the whole point of "risk prevention" you stop when things get bad so they don't get worse. Much worse. For failure to follow these rules not only kills your capital, but also your faith in yourself.
Risk and money management is the only thing that stands guard over your capital. The tight union of risk and money management will allow you to pacify your greed and emotions.

Save your capital at all costs
The saving of capital is the main, key task of a trader. And not at all to make money, as beginners think. It is impossible to do without the correct risk, money and time management.
Following of the rules you have created yourself will lead to forgetting what it is like to lose your whole capital on emotions. After all, it's not difficult to stop losing money. You just need to get away from the chart and the terminal. It would seem, what there is difficult?

But people who have confused speculative markets with casinos, keep on "winning back" and lose everything.
Take care of your money. Use the tools that are designed to do the job. Only then you can make a qualitative leap forward and enjoy all the pleasures of compound interest when profit piles up on the capital you've saved, new profit piles up on it.