Risk management is more than just protecting your capital, it’s also about protecting yourself.
Let me explain what I mean:
First off… we all know that risk management is key to protecting our capital… meaning that we risk only a small amount of our capital on any given trade. This means that we should not do any significant damage to our accounts because of any one losing trade. It also allows us to place many small bets (with an edge) which should be profitable over time without significant drawdowns.
On the other hand if we do risk big, we run the risk of big drawdowns and blowing up.
As an aside… I do understand with bigger risk (very risky) there’s also the potential for bigger gains, but that’s not the focus of this post.
Now… let’s say because a trader risks too much he / she goes into a big drawdown or blows up entirely. This is an example of poor risk management. Other than monetary capital that was lost, there is a possibility that this trader did damage to his/ her “mental capital”.
Damage to “mental capital”?
Let me explain with an example.
Let’s say a trader blew an account because of bad risk management, scrapes more money together and after a while starts trading again. All of a sudden this trader encounters a couple of new problems like:
- Hesitating / can’t pull the trigger to enter a trade.
- Taking profits early.
- Not sticking to stop losses
- Emotions which are elevated when trading
These problems could be because of the account this trader blew… blowing the account might have had some negative repercussions. This is an example of damaging your “mental capital”.
This is not a great place to be as a trader…. it could be hard to work yourself out of it. That’s one more reason why good trading starts with proper risk management… not just to protect your capital, but also to protect yourself.
Finally:
Trading is risky, but we need to take risks in trading in order to make money… it’s something we can’t get away from. But it’s entirely up to us how much we decide to risk… and how much we risk will determine our wellbeing going forward.
Thanks so much for reading. Hope you and your loved one are well and safe.
Thanks and Regards,
Trading SOS SOS