Risk Management Psychology

[qlai]

I am looking for opinions regarding trading behavior that causes traders to take over-sized position sizes.

I don't have an answer (nobody but you does), but I struggle with this too. I think when we spend so much time and effort but making insignificant money due to account size, there's a very strong urge to bet it all to make a dent in the account. We want to see(show to someone as prove?) real(sizeable) rewards for our efforts. I think you have to force yourself to think long term. Understand that if you conquer your deamons, the payoff will come. Patience and confidence in the face of uncertainty is the hardest part.

BTW, don't compare this to rouge traders trading company's money. They take oversized risk and the worst case usually is for them to be queitly let go with huge commission off that rouge trade. The risk/reward is excellent. But if you blow up, the best case it will add years to your goals/dreams.

p.s. read my "choose your strategy well" post.

 

[wrbtrader]

Looking for opinion on Risk Management Psychology. I've develop my trading system over many years. It makes 1.5% to 2% per week consistently. Only 2% of capital is risked per trade. I trade only 0-2 times per day.
I managed to stick to the rules most of the time. However, every 2-3 weeks or so, I sorta go crazy and start risking 20-30% of capital. This usually ends in tears. I don't understand what causes this. I suspect this also affects all the "rogue traders" out there.
My best guess is that after constant wins, I go into a sort of euphoria and think I can get rick quick and start increase position size. I can't seem to overcome this mental handicap.
Another possibility is that when markets are ranging and there is not much action, I get bored and am looking for action.
I am now reading "Trading in the Zone" to see if it has any answers. Has anybody experienced this and overcome it? Please share.

If this is a repetitive pattern...just repetitively move your "profits" out of your trading account before that craziness grab you...you wanting to risk 20-30%.

Simply, pay yourself like a pay check with those profits. This will then start your capital all over again...keep repeating this process...every 1 - 2 weeks you move your profits out of your trading account prior to that euphoria kicks in every 2- 3 weeks.

Thus, don't let the mental handicap control you. Instead, remove your profits after your win streaks of 1 - 2 weeks so that when the mental handicap surfaces again...it will not impact your profits becacuse you've already removed it via putting it into your bank account.

I know the few profitable traders out there are trying to grow their accounts and consistent removal of profits doesn't allow growing your capital but you need to remember you have a problem right now and your goal should be to do whatever it takes to protect those profits...often protection may involve removing the profits from the markets while you pour yourself into any "trading psychology" literature out there.

I think maybe we are brainwashed into just leaving our profits in our trading account to compound it into being rich...reason why you see so many traders running around talking about how much money one will have at the end of 1 year, 2 years, 5 years, 10 years and so on as if their profits today will continue being similar like the months/years going forward when using the trade method that they believe (I use that word with a little sarcasm) has a positive expectancy.

I suggest you spend more time reading up on "Behavior Finance" instead of "Trading Psychology" books to better understand how money (your trade capital) impacts your trade decisions (cognitive decision making process)...

I think behavior finance is more suited with dealing with risk management than trading psychology.

wrbtrader

 

[LanceJ]

Low self esteem, your subconscious has been conditioned to destroy you. Why do you value your life so little? Happiness is not in "big rips", let go of the dumb trades, Happiness is already inside you.

 

[R123]

Looking for opinion on Risk Management Psychology. I've develop my trading system over many years. It makes 1.5% to 2% per week consistently. Only 2% of capital is risked per trade. I trade only 0-2 times per day.
I managed to stick to the rules most of the time. However, every 2-3 weeks or so, I sorta go crazy and start risking 20-30% of capital. This usually ends in tears. I don't understand what causes this. I suspect this also affects all the "rogue traders" out there.
My best guess is that after constant wins, I go into a sort of euphoria and think I can get rick quick and start increase position size. I can't seem to overcome this mental handicap.
Another possibility is that when markets are ranging and there is not much action, I get bored and am looking for action.
I am now reading "Trading in the Zone" to see if it has any answers. Has anybody experienced this and overcome it? Please share.

OK, I had this problem, the cause to your problem maybe different than the cause that created my problem. But on the chance its the same cause, mine was simply trying to come up with a system that NEVER loses, and to prove this to myself, I would take overtrade to salvage gains for the day/week etc. Infrequent trading systems can add to feeling like you wasted time when you get a loss. If this is the cause ? Solution, you MUST embrace the losing trades as unavoidable, take your loss, deal with it, and accept the fact NO system wins 100% of the time. Failure to stop the "crazy" will one day result in the mother of all losses.

 

[JSOP]

I am trading the system live on a small account. The strategy is not the issue. The issue is as described. I am only able to follow the system for 2-4 weeks before the same pattern of behavior occurs. Not taking into account the wayward trades, the system is still profitable.

The answer to explain your behaviour is very simple: You haven't been burned or burned enough by your risky behaviour yet. We only stop what we do when we get burned and burned badly. It's not ego or not happy with life or whatever. It's Pavlov condition. As long as we are not burned yet and still get rewards from our behaviour, we will continue to do it until we get burned. We all think we are super genius God that we are invincible that we are King of the World but at the end of the day, we are just like any animal in the animal kingdom including that poor dog in Pavlov's lab. We respond to positive rewards and we will only stop responding to something when the reward is no longer positive.

You know it's reckless to risk 20% - 30% of the capital but you see your system is consistently profitable so you think to yourself why earning just 2% per week when you can earn 20% to 30% week when you risk 10% - 15% more and every time when you do that, right now you actually get rewarded with higher returns and then you get scared afterwards thinking of the possible loss that you could've made so you go back to you original plan of risking just 2% again but then you got bored again after a while and try to risk more again and on and on with the cycle just repeating itself. This cycle will repeat itself as long as you are getting the positive rewards of higher returns each time when you risk 20% - 30% of the capital and you will only stop this until one day you risked 20% - 30% of the capital and lost everything, everything that you have made or even worse even owing debit balance to the broker on top of what you've lost, then and only then, you will stop risking such high amount of the capital again and you will find a way the most effective way to force yourself to stick to the original risk limit of your capital. We don't need to tell you how to stop risking high amount of capital, a book won't be able to do that either, once you've got burned by the negative rewards from risking too much capital, you yourself will find the best way to control and stop your over-trading impulses. And you only need to be burned once and I guarantee you you will never be risking more than 2% of your capital ever again or until you forgot that negative rewards of getting burned and then everything just repeats itself.

Nobody is immune from this even the most powerful banks and brokerage houses on Wall Street. Every single of them all have risk management department, an entire department that designs those super-sophisticated risk management models to help them control risk but they still blew up and caused the financial crisis of 2008. Now after losing trillions of dollars, with 2 brokerage houses forever gone, now they are putting in strict risk control limits, going through stress tests... Pavlov man, Pavlov. Gets us every single time.

I hope you good and safe trading!

 

[deaddog]

You have a discipline problem. If you can't follow your own plan then get someone who will.
If you have faith in your strategy then hire someone to trade for you.
If he/she doesn't follow the risk management part of the trading plan they get fired.

Short of that, you could buy an electric brad nailer and drive a nail into your knee every time you don't follow your plan. I'll bet it wouldn't take too many nails to make you a disciplined trader.

 

[qlai]

However, every 2-3 weeks or so, I sorta go crazy and start risking 20-30% of capital. This usually ends in tears.

Can you clarify please? Are you risking all of your previous gains or you actually go from profits to losses? Big difference. Nothing wrong with pressing it at the perfect time, as long as you only risk gains.

 

[Weelor]

On your place, I would analyse well my bad deals to make an reflection of my previous thoughts and basis for strategy development in order to understand where was actual mistake. This would provide you with some understanding of your trading weaknesses.

 

[Steve Alexander]

Looking for opinion on Risk Management Psychology. I've develop my trading system over many years. It makes 1.5% to 2% per week consistently. Only 2% of capital is risked per trade. I trade only 0-2 times per day.
I managed to stick to the rules most of the time. However, every 2-3 weeks or so, I sorta go crazy and start risking 20-30% of capital. This usually ends in tears. I don't understand what causes this. I suspect this also affects all the "rogue traders" out there.
My best guess is that after constant wins, I go into a sort of euphoria and think I can get rick quick and start increase position size. I can't seem to overcome this mental handicap.
Another possibility is that when markets are ranging and there is not much action, I get bored and am looking for action.
I am now reading "Trading in the Zone" to see if it has any answers. Has anybody experienced this and overcome it? Please share.

Best advice I have for you is - get a coach. I worked with Andrea Wylan. She used to be a member here, but I'm not sure if she is still on. Her website is Awylan.com. Good luck.

 

[BrooksRimes]

Looking for opinion on Risk Management Psychology. I've develop my trading system over many years. It makes 1.5% to 2% per week consistently. Only 2% of capital is risked per trade. I trade only 0-2 times per day.
I managed to stick to the rules most of the time. However, every 2-3 weeks or so, I sorta go crazy and start risking 20-30% of capital. This usually ends in tears. I don't understand what causes this. I suspect this also affects all the "rogue traders" out there.
My best guess is that after constant wins, I go into a sort of euphoria and think I can get rick quick and start increase position size. I can't seem to overcome this mental handicap.
Another possibility is that when markets are ranging and there is not much action, I get bored and am looking for action.
I am now reading "Trading in the Zone" to see if it has any answers. Has anybody experienced this and overcome it? Please share.

Check out 'Habitudes of Highly Successful Traders' by Ruth Barrons Roosevelt. Habitudes is kind of an odd, made up word, but the book and author are very good. You may find the answers you are seeking. https://ruthroosevelt.com/