My kids once asked me, “Dad, if you had a superpower, what would it be?” I immediately answered, “The ability to see 5 minutes into the future!” Of course, that wasn’t what they expected to hear so they looked confused. I merely pointed out that my job as a professional trader would be a lot less risky if I had that power. There would never be any risk of loss because I would KNOW what the market is going to do in the next 5 minutes.
We all know that it isn’t possible to tell the future, as nice as that would be for our trading. There will always be that risk of uncertainty and the unknown. Ironically, I have heard traders trying to sell their signals or their strategies to beginner and novice traders by using phrases like
-“Trade with less risk to your account”
-“There’s little to NO risk!”
-“Stay ahead of the markets and trade with NO risk!”
Anyone who has been in the world of trading long enough can easily spot those over-exaggerations about trading with “no risk.” But, it’s understandable to want that to be true!
Risk is potential pain, hurt or struggle. It is built into our human brains to protect ourselves from such things. And most traders I know are human, so we all try to avoid pain, hurt and struggle as much as possible.
Every time you press that buy or sell button, you’re putting your account at risk of losing some of its balance. No matter how great your strategy is; no matter how awesome your friend is at trading who told you want to buy or sell; no matter how great the track record is on this guy or that, you stand to lose some money.
Possibly, ALL of your money.
Well, this is why risk management is so important. Because it protects you from the pain of losing everything, your money, your discipline, and your self-respect. Essentially, it’s pain management. If you can manage the potentially pain you might feel from taking a loss in your trading, while the sting of that pain is still there, it can be greatly reduced.
In fact, that pain can eventually disappear if you approach your trading correctly. “Really?” I can hear you say, “Tell me how!” Well, I’ll tell you.
Risk Management. (cue *eyeroll*)
Having a focus on the risk management component of your trade plans, you are setting proper expectations for yourself, and for that part of your brain that is wired to protect you from pain and hurt and struggle, and you can warn yourself of that potential pain. Your risk management, as part of your overall trading plan, is that warning. And eventually, as you develop the habit of follow proper risk management you already know that the pain will likely come, so you are ready for it.
Some would argue that this pain cannot be lessened, even the most seasoned professional trader still feels pain at a loss. But with many years of following proper risk management, you’ll survive long enough in the markets to become somewhat used to the pain, possibly even immune.
I remember a story from long time professional commodities trader, Larry Williams, who made this point of getting used to trading losses, to feeling that pain. He was helping his dad with some beehives and was all covered up in his protective gear, but his dad wasn’t. He said, “Dad, why aren’t you wearing any protective clothes? You’re getting stung!” And his dad responded, “Oh, I’ve been stung so many times that it doesn’t bother me anymore.”
I don’t have that “5-minute-look-into-the-future” superpower that my kids asked me about, so every time I come to the markets to trade, there’s risk of getting stung, the risk of losing money, the risk of feeling pain.
What is your trading career if there isn’t any risk? Boring.
What is your trading career without risk management? Short.
Traders! If you manage your risk, you’ll manage your pain well enough to get to that golden honey at the other end!
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