Understanding the Risk Spectrum in the Stock Market
Have you ever heard the expression, ‘trading is the hardest easy money you could ever make”?
On the surface, trading looks effortless - find an edge and then trade it. Trading gurus will tell you to ‘plan the trade and trade the plan’. It sounds so simple.
What truly happens is very different.
We worry about getting into the next trade after taking a loss. So we ‘just watch’ instead of getting on the next one, and it turns out to work without us!
We become anxious after entering a trade, wondering if it’s going to work, so we exit early as it begins to stall out, thinking, ‘a small profit is better than no profit’; or if it starts moving against us, ‘I’ll just get out now and save myself some money before I get completely stopped out’.
We become bored or impatient, waiting for the next trade and watching all the movement on the chart. The impatience manifests as FOMO and we jump into a trade.
We become frustrated after taking a loss, especially after seeing that ‘losing’ trade reverse back in our direction after our exit; so, we decide on the next trade we’re going to make our money back and we increase our size. And that next trade ends up costing us even more money!
Sound familiar?
Discomfort, anxiety, frustration, and other emotions, generate energy. And what you do with that energy defines you as a trader.
Yes. Think about that for a moment.
I see this all the time, in my own trading, and as someone who works with a wide spectrum of highly successful to struggling traders.
I wish to share something I do when I talk to a trader, including all my 1:1 coaching clients, that I think will help you if you learn to do it for yourself.
The risk continuum. As a coach, I use a risk continuum where one end is extreme risk aversion, and the opposite end is extreme risk-seeking. It’s a continuum, with lots of gray in between the edges.
Although you probably move around on the spectrum, most traders have a default position on the spectrum that is the place they go to when the going gets rough.
I encourage you to always think about where you are on the risk continuum when facing the market. Besides asking yourself where you are, two additional questions to ask yourself include: What usually ends up happening when I’m here? and, is this the place I should be for longstanding success?
In a future blog, I’ll explain why it’s more powerful to use self-directed questions instead of telling yourself what you should be doing.