by Amanda Harvey
Coping with Trading Risks -- The Relationship between Risk and Trading
Coping with trading risk is absolutely vital if a trader is to experience both success and wellbeing. Risk is an inherent part of life, but the stock market magnifies this innate risk and uncertainty.
Risk is, in fact, what enables the stock market to function, and without this risk, the opportunities to make money trading would simply not exist in the sense that they do.
Importance of Risk
Risk is not only an inevitable thing, and a big part of what makes the markets operate, but risk can be a good thing when kept in a reasonable balance. Without risk, there is no growth, and growth is clearly something worthwhile in all aspects of life.
To quote Erica Jong, “If you don't risk anything, you risk even more.” In the context of this article, what is the more that would be risked by being unwilling to risk anything? Well, to start with, an unwillingness to risk anything puts a person out of the running for having any involvement in the stock market. It is also the kind of mentality that may lead to stashing money under a mattress, which is still not a risk free proposition. Banks and investing in housing may seem low risk ideas, but even these areas are not without risk.
While refraining from trading on the stock market certainly does not mean that a person can’t be successful and profitable, it does constitute missing out on a lot of potential for both the satisfaction that can be experienced in trading, and the myriad of opportunities for financial gain.
Based on this, it makes sense that a trader must have a certain tolerance, and even a liking of risk, and certainly must develop strategies for coping with trading risk.
Ways of Coping with Trading Risk
There are obviously many practical actions that can be taken to limit and manage risk, and doing so goes a long way towards coping with risk in trading from the emotional standpoint. Some of these methods include using solid trading plans which contain clearly defined entry and exit points, implementing stop losses, diversifying investments, and steering clear of investing money that the trader cannot afford to lose.
Another step for a trader to take towards coping with trading risks is to identify clearly their own level of tolerance for risk, and to operate firmly within these boundaries. While there is a need for a certain amount of risk in order to profit from trading, this risk can be kept to a fairly minimal level, which can allow a trader to make slow and steady gains without pushing themselves too far out of their comfort zone. Bigger risk does not always mean bigger gain, and a balanced approach is always the best strategy.
Keeping the big picture firmly in mind also helps in coping with risk in trading. When a trader becomes too focused on one particular trade, and it feels like the outcome of that trade is all-important, this can magnify the feeling of risk and accompanying stress way out of proportion. By reminding themselves that this is just one trade out of many, and that the risk is only a portion of what they invested on this trade, as they wisely ordered a stop loss, and that what they invested in this trade is only a percentage of their investment capital, which in turn is only a fraction of their total assets, they can put the amount of risk back into a reasonable perspective and regain their sense of equilibrium.
Risk is an inherent part of trading and the stock market, and learning to understand this risk, to manage it effectively and to find ways of coping with the risk in trading is an essential part of creating a winning trading mindset.