Question: The Bigger the Risk, The Bigger the…?

In this post I explore how taking on bigger risk can influence your trading. I also offer an alternative approach which will get you off to a better and smoother start. If this sounds good to you, please read on.

What I Mean by Risk:

There are many types of risk in trading—news events, geopolitics, or company earnings, etc.—all of which can cause erratic price action and volatility, and gaps that can do big damage your account.

But for this post, I am referring to a specific risk: the exact amount of money you lose when your stop loss is hit on any given trade.

How Trading too Big can Influence Your Trading:

Back to the question in the heading: The bigger the risk, the bigger the…?

Answer: The bigger the risk you take, the bigger your emotional swings will be, which can lead to the following:

• Revenge trading.

• Being “stuck” to the screen. Always checking in on your trades, prompting bad decisions.

• Taking profits too soon (fear /greed/anxiety).

• Closing trades before the stop is hit (fear).

• Holding on to losses and averaging down (adding to losses).

In short, taking on too much risk causes you to deviate from your strategy because your emotions—rather than your plan—are making the decisions for you.

A Possible Solution:

To make this work, you need a backtested strategy with a positive expectancy—one that fits your personality and your lifestyle. Once you have that, try this:

1. Demo / Sim trade just to get used to the ins and outs of the strategy. Keep this phase short because there are very little emotions involved.
2. Once comfortable with executing the strategy on demo, move to live trading. Start with risking the smallest amount possible. Journal and review all your trades. Fix your mistakes, address your weaknesses, and do more of what works.
3. Increase your risk only after you’ve shown a profit and proven you can stick to your strategy through both wins and losses. Continue your review process religiously the same way as in no. 2.
4. Repeat no. 3 until you reach a risk level that doesn’t keep you up at night, but remains meaningful enough to grow your account and keep you focused.

Doing it this way doesn’t promise overnight success, but it provides the right foundation: it protects both your financial and psychological capital while you master the nuances of the market.

Finally:

Although this way might feel like it will take too long, remember that taking shortcuts is usually exactly what makes your journey take the longest.

Thanks so much for reading. All the best with your trading.

Thanks and Regards,

Trading SOS SOS