I was talking a with a trader the other day who is struggling and he mentioned a tendency that he has. I think all of us have done this at some time or another, but if we don’t grow out of it, it WILL end our career.
The problem could be described as Risk Spikes. They win slowly and conservatively, trading by their rules and risking a small amount of capital, but then all of sudden they get sick of the slow capital growth. Instead of realizing that by waiting another day, a month or a couple months their positions will continue to grow in size (proportionate to their account), they charge into a trade taking excessive risk and gambling on making a big profit to speed up the process.
Let’s face it, this may work and give us a nice bump in the account. We may even be able to do it several times in a row and we promise ourselves this will be the last time. But the psychology which starts that need to speed up the process does not just go away. It needs to stop completely and never be done.
If Joe-Trader is day trading 200 shares, and collecting small profits, those profits will grow and over time we will be able to trade more and more shares (and more and more money). But if he trades 200 shares, and then all of a sudden grabs 1000 shares on a particular trade (assuming same price area, volume, volatility and all that) it has the potential to wipe out a lot of little profits if the trade goes sour.
There is strong desire in certain people to say “I can afford to take the risk.” In life we do take risks, and often they pay off, but if we want to trade as a career for the long haul, if we are saying this to our self it is obvious we are about to deviate from our trading plan. Our trading plan which was created when we weren’t under stress or pressures….created when our mind was clear and logical.
Every trade has risk attached to it. We know this. We have a standard level of risk we take on each trade that will not do much harm to overall capital. If we start to say “I can afford the risk” we are likely planning to do something that is well beyond what we normally risk. We are groping for reasons to make the trade and this is not a good sign.
In circumstnaces like these take your standard position. Then, tell yourself that if it moves in your favor you will add to your position (in alignment with your risk tolerance) when it passes through another critical level.
Don’t give respect to a move that hasn’t happened yet. Let it impress you with what it actually does, and when your original position is onside you can add to it in a conservative way. Risk spikes will only bring frustration, regret, stress and an empty account over the long run.