Your Risk Relationship – The primary cause for trading emotionally.

Your risk relationship – the most important relationship in your trading life

 You may be able to remember when you learnt to ride a bicycle. At first you started off on training wheels getting a feel for your balance in real time and space. You probably started off in a small space, then in a larger space maybe the backyard, going faster and faster.You had to learn when to go fast, when to brake, when to brake in advance of things moving around you.You were probably aware of the potential for an accident but the risk associated with it was probably not in your mind.

 But…. After your first big crash you became very aware of the potential for pain from your new activity. each moment you are on the bike represents the potential for fun and rapid movement to your destination and the pain of an accident. You learn to manage the risk while enjoying the rewards

So it is with trading, Whenever you are trading, risk is present…how you relate to that risk will define both your trading  and your emotional states. It doesn’t matter if you are trading forex, trading equities, trading cfd’s, trading options or trading indicies. When you engage with risk emotional states are generated.

By properly understanding your risk relationship you can:

  • Find an appropriate trading methodology that works for you
  • Define your position sizes
  • Define your trading frequency
  • Define your instrument/market of choice
  • Define the degree of leverage you are using.

 An important understanding about your relationship with risk.

Your relationship with risk is constantly changing.

IT may change when:

  • You have had a string of winning trades.
  • You have had a string of losing trades.
  • Your personal circumstances have changed, if health and relationship issues.
  • You have changed your trading instrument and methodology.
  • You have improved your trading skills substantially.
  • You have started a family or your family has increased.

 As you can see, you risk relation change frequently and consequently the emotional states you experience in your trading will correspondingly change frequently.

 How to use this information:

 Awareness of a problem allows you to mitigate against the problem.

Understand the fact that your risk relationship changes frequently means you can monitor how you are relating to risk and when that relationship changes.

 If you risk tolerance decreases after some of the above mentioned events you should consider some of the following actions:

  •  Ceasing trading until your ability to tolerate risk has returned.
  • Paper trade until you are comfortable with the execution of your trading plan
  • Reduce your positions size or trading balance.
  • Decrease the frequency of your trading or the time frame of your trades

 If you risk tolerance has increased after some of the previously mentioned events you should consider some of the following actions:

  • Increasing your position size.
  • Consider increasing the leverage you are using in your trading.
  • Consider paper trading a more highly leveraged instrument
  • Increase the number of trades you make.

Your relationship to risk is continually changing and you need to adapt your trading to your risk tolerance. If you are clear about your risk and manage your relationship will you can trade with a  clear mind and follow the execution of your trading plan well.

This and many more useful topics are covered in the Clear Mind Trading Course. For more information please go to http://www.tradingstate.com.au.

We have upcoming courses on Tading Psychology coming to Brisbane on the 28-29th of August and 4-5th of September in Sydney.

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