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It’s no secret that financial trading comes with plenty of risks, particularly when it comes to losing hard-earned money.
Renowned trading psychologist Brett Steenbarger has pointed out that there are also other risks involved which many of us easily overlook. Do you find yourself guilty of any of these, too?
1. The risk of boredom
A lot of people are drawn into trading because of the prospect of making big money in a relatively short span of time.
But sometimes, there’s just not that much action in the market or your trading system simply isn’t catching any of the moves.
If a trader is impatient, he could resort to abandoning his trading system or could find himself forcing trades.
If you find yourself fidgeting and can’t wait to get a piece of the market, it would be better for you to take a step back from your charts.
2. The risk of “drawups”
We’re fully aware of the dangers and pains of drawdowns, but did you know that you also face risks when your account rises in value or incurs a “drawup”?
That’s right! Traders also experience a risk after going through a series of wins.
After having a successful streak, many traders tend to make bad trading decisions because of overconfidence. They end up increasing their position sizes to unmanageable levels, taking too many trades, and abandoning their trading plans.
This is precisely why it’s important for traders to always keep their emotions in check. Failing to do so can lead you to be lax with your trade execution. Remember to always stick to your trading plan and keep your ego in check!
3. The risk of sequencing
No matter how well you manage your trades or how consistent your trading system is, you never really know in advance the sequencing of your winning and losing trades.
A trader experiences sequencing risk when he begins to take the sequencing of his wins and/or losses out of statistical context.
For instance, you may go through a series of wins and think that you’ve mastered the markets, which can easily lead to overconfidence.
Alternatively, a series of losses may make you doubt yourself or your trading strategy, leading you to deviate from your trading plans and make bad trading decisions.
Even times of alternating wins and losses can be perceived the wrong way. If you see your account balance just bouncing up and down without any real progress, you may take it as a sign that you’re not improving and lose motivation or give up altogether.
Luckily, there is a way to avoid this dangerous mindset. By using a trading journal, you can help put things into the proper perspective and keep the bigger picture in mind.
