Risk Management Psychology

Discussion in 'Risk Management' started by bitstream_ryder, Dec 9, 2018.

  1. Looking for opinion on Risk Management Psychology. I've develop my trading system over many years. It makes 1.5% to 2% per week consistently. Only 2% of capital is risked per trade. I trade only 0-2 times per day.
    I managed to stick to the rules most of the time. However, every 2-3 weeks or so, I sorta go crazy and start risking 20-30% of capital. This usually ends in tears. I don't understand what causes this. I suspect this also affects all the "rogue traders" out there.
    My best guess is that after constant wins, I go into a sort of euphoria and think I can get rick quick and start increase position size. I can't seem to overcome this mental handicap.
    Another possibility is that when markets are ranging and there is not much action, I get bored and am looking for action.
    I am now reading "Trading in the Zone" to see if it has any answers. Has anybody experienced this and overcome it? Please share.
  2. When it comes to trading, psychology is a word to often mixed up with stupidity. So much money has been made selling ways to master your psychology. There are countless of threads on this forum where people are brainwashed to believe "if only I could master my psychology, I would be a great trader".

    First I would see if you could get a refund for "Trading in the Zone".
    Second I would trade as much as I could with a small amount of capital until you realize, it's not your stupidity, but rather your trading system.

    Lastly, Psychology becomes a factor when you find out your wife has cheated on you and it kicks you into depression where you are not doing good research, showing up to work late, to scared to make a bad trade etc....

    Getting all gitty because your up 20% and blowing it because you are "bored" is called stupidity. Hope that helps
  3. First and foremost, I have been trading a number of years on small real money accounts. Two, this is a observable, repeating pattern that has dogged me for a long time. The first step in overcoming this is to clearly identify the issue. I have used the term "trading psychology" as I have lack of a better term to describe it. This is the reason why I am asking opinions of people who have experienced it (I'm sure I am not the only one), understood the issue and overcome it.
  4. Tons of people have this "issue". You will here the same solution over and over again. But i'll try and write something a little different that will help you understand that it's not your psychology but rather naivety (if thats even a word).

    Lets say you have a system that you were able to backtest. You tested it on 30 years of data and got good results. Then you did some out of sample tests and also got great results. You did a whole bunch of statistical tests to figure out what your draw downs will look like, what your big winning days will look like, how much you should bet etc.. etc.. The strategy tells you exactly what to do. When to buy, when to sell, where to put your stops etc.. (like you said it's a very specific strategy). Would there be any emotions when you start trading the strategy? Maybe at first because your excited that your making money, but eventually, it will become routine for you. There will be seldom surprises, because you have rigorously tested your model.

    So is your problem really psychology? Or is your problem, your trading strategy?
    If you can not back test your strategy, you have to find some other way to quantify your edge (like many do for derivatives trading). Until then, your account will only lose money....unfortunately.
  5. I am trading the system live on a small account. The strategy is not the issue. The issue is as described. I am only able to follow the system for 2-4 weeks before the same pattern of behavior occurs. Not taking into account the wayward trades, the system is still profitable.
  6. Cmon dude, you have no idea if your strategy works, so you end up taking random trades. You said you have a specific strategy. If your supposed to buy when the sma 10 crosses the sma 20, and instead you buy when the sma 10 crosses the sma 15 that just proves you thought taking the second trade would be more profitable then the original strategy. It's not your mentality, but the confidence in your system.

    If it's really that hard to keep your finger off the trigger, pay someone whose better at following instructions to do it. 3% a week will get you to millionaire status in no time.
  7. I know the strategy "works" as I have 50 observations with stable results. I have also posted on another part of the forum (where you have also replied) asking for advice as to how many observations are required to deem the system statistically significant rather than luck (which you also replied that I only need a month of data where I have more than that). So unless I have misunderstood you, in one part of the forum you are saying I have enough data to say the system is stable, and in this thread you are saying that the system doesn't work.
  8. Nope, you are getting a bit mixed up. You said your strategy makes 2-3% of net liq a week. You also said you do about 40 trades a month. So if you have done 50 trades your account should be up ~10%. If your account is negative after 50 trades, your strategy is probably not as good as good as you think it is.
    If your account is up ~10% after the 50 trades in one month, you most likely have a great strategy and should push it to the limit. That being said I do not know what the variance in your PnL looks like so we are missing half the story.

    Why don't you post the results here? That way we can help you test your strategy. heck, if you think the strategy makes 3% a week, ill write a back test for you.
  9. Thank you for your offer. It is not a trading strategy issue. My trade record (bar the over-sized trades) shows that the system has a positive expectancy. I am looking for opinions regarding trading behavior that causes traders to take over-sized position sizes.

    You will see similar patterns with Nick Leeson and John Rusnak among others.
  10. jonahern


    sounds like ego issue (easily described as "stupidity" also)
    #10     Dec 9, 2018
    murray t turtle likes this.