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Psychology of Taking Risk – Four Things I Learnt From Trading Financial Market

Psychology of Taking Risk – Four Things I Learnt From Trading Financial Market

Trading in the financial market can be overwhelming and risky especially when you’re using a live trading account.

There is an adrenaline rush associated with taking risks. And it’s important for you to understand this rush before you start trading in the financial market. Trading in financial markets is the frequent buying and selling of financial instruments with the aim of out-performing buy-and-hold investments.

In other words, there really is no ownership of the underlying market. Traders are merely speculating on price movements of investments. Traders can make profits from depreciating markets as well as from rising investment/market. These profits can be unbelievably high as well as devastatingly low. Some traders can make returns that are as high as 30-40% short term investments.

A financial instrument is a tradable asset of any kind like currency pairs also known as forex, commodities, stock indices, and stock of companies also known as individual equities. What financial traders mainly do is to speculate on the price of futures contracts for forex, shares, commodities and stock indices. Therefore, any movement in the price of physical asset will see a similar move in the price of the contract.

The financial market operates purely on taking risks and nobody knows what the price of any of these financial instruments will look like in the next hour. Forex traders and market professionals know the risks associated with these speculations and yet millions of stock brokers still peg their money on these speculations.

In case you’re convinced that trading the financial market is meant for you, here are four important things you should keep in mind based on my experience in the market.

#1. Avoid analysis paralysis

Most traders start out by taking in information from multiple sources in form of stock picks, books, seminars, trading coaches, self-acclaimed gurus and all sorts. Eventually you may have too much information at your fingertips leading to analysis paralysis.

Knowledge may be power but you need to find a system that work best for you and align it with your trading objectives. With time, you’ll create a system that will protect you from the noise in the market.

#2. Accept that the market is random

This is a fact that you must come to terms with. You’ll either lose money trying to trade based on forex trading news headlines or gain more money trying to keep abreast with the major trends in the market. And the earlier you know this the better.

According to the random walk theory, the past movement of a stock or overall market cannot be used to determine its future movement. In simple terms, it means that stock can take a random and unpredictable path.

Although this theory may be unpopular with a lot of people as it mainly suggests that attempts based on technical, fundamental or any other analysis are futile. This does not however mean you should stop studying the market. In my personal trading experience, this did not make much of a difference.

#3. Chasing big wins: The risk taking euphoria

Trading the financial market is usually more of a grind and not necessarily that one big win. So many people still long for the big trade that’ll provide them with an early retirement and allow them to travel the world.

It’s possible but it can also be a death trap. This is because going for the big win will expose you to huge losses which can be devastating. No matter the tempting adrenaline rush, it’s always better to manage your risks. This will help you reduce your losses to the barest minimum.

#4. Try not to be greedy

This is easier said than done. You don’t have to trade every day. Those who think that they have to trade everyday will often lower their standards, chase the market or force trades. More activity in the financial market does not necessarily guarantee more success.

Review your trade history and be objective about whether you are trading just for the “rush” or if you are trading because it makes sense with your other trades.

 

By Toby Nwazor, ContributorSuccess Coach, Business Development Consultant, Motivational Speaker, and Writer

www.huffingtonpost.com

 

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