Embracing Risk

May 13, 2021

Mark Douglas #3 

Every trader must know that when you place a trade in the financial markets, you are taking risks. What the outcome will be is simply not 100 % sure.  

The best traders take the risk and have also learned to accept and embrace that risk. The best traders don’t care if they lose that specific trade or not. 

There seems to be a huge psychological gap between successful traders and non-successful traders. The latter assume you are a risk-taker because you put on trades, but the former knows it is all about fully accepting the risks inherent in each trade. By fully accepting the risks involved with trading, and each of the trades, it will have profound implications on your bottom-line performance. 

The best traders put on their trades without the slightest bit of hesitation of internal conflict, without any resentment, grief, anger, greed or any other emotion that could cause them to deviate from the strategy. They also have an openness about and admit that certain trades don’t work. 

The best trader can get out of a trade, even at a loss, and doing so doesn’t bring forth the slightest bit of emotional discomfort. According to Mark Douglas, if you cannot trade without the slightest bit of discomfort and fear about losing, then you have not learned how to accept the risks inherent in trading 

This is a big problem according to Douglas, because to whatever degree you haven’t accepted the risk, is the same degree to which you will avoid the risk. You are then trying to avoid something that is unavoidable and that will as such have a disastrous effect on your ability to trade successfully. You have to learn to accept the risk. That is probably one of the most important skills to learn in trading, actually in investing too.  

No matter how much you learn about the market’s behaviour, no matter how brilliant an analyst you become, you will never learn enough to anticipate every possible way that the market can make you wrong and cause you to lose money. 

If you are afraid of being wrong or losing money, it means you will never learn enough to compensate for the negative effects these fears will have on your ability to be objective and your ability to act without hesitation. In other words, you won’t be confident in the face of constant uncertainty. The hard, cold reality of trading is that every trade has an uncertain outcome. Unless you learn to completely accept the possibility of an uncertain outcome, you will try to avoid, either consciously or unconsciously, any possibility you define as painful. 

Getting the right mindset for trading and investing might be difficult because many of the thinking patterns that adversely affect our trading are a result of the natural ways in which we were brought up to think and see the world. These thinking patterns are so deeply ingrained that it rarely occurs to us that the source of our trading difficulties is internal, derived from our state of mind. For example, when risks and danger show up, we should act more carefully. If something is uncertain, we must take necessary measures. This applies to the world of trading and investing as well, it is called risk management and using a strategy. At the same time, these techniques are in place to ensure we trade and invest with our head, instead of our heart. In order to accomplish that, you must have a solid, mental and psychological foundation fit for investing and trading. This comes with experience, and a mentor can guide you quicker to the goal. 

As Mark Douglas summarizes it, market analysis, other specific strategies or know how to find opportunities is not the path to consistent results. 

When you operate from the assumption that more or better analysis will create consistency, you will be driven to gather as many market variables as possible into your arsenal of trading tools. But what happens next? You might still feel disappointed and betrayed by the markets or any other external factor, because of something you didn’t see or give enough consideration to. It will feel like you can’t trust the markets or the strategy. However, the reality is, you can’t trust yourself.  

According to Douglas, the traders that are having consistent profits are not by definition those with the best analytical skills of the market or the best “edge”. It seems to not be related that much to market analysis skills. Success comes from the right mindset and being in “the zone” as he calls it.  

I am sharing all of this with you because you deserve to be in a state that is better than the disappointments, than losing faith, not trusting yourself.  

Douglas presents us with two choices: Firstly, we can try to eliminate risk by learning about as many market variables, indicators or other tools as possible. He calls this the black hole of analysis, because it is the path of ultimate frustration and endless learning, or  

Secondly, you can learn how to redefine your trading activities in such a way that you truly accept the risk, and you are no longer afraid. 

Let me quote a blogger to wrap this section up. “The irony is that, when you have the appropriate attitude, when you have acquired this “trader’s mindset” and can remain confident in the face of constant uncertainty, trading will be as easy and simple as you probably thought it was when you first started out.”  

I can definitely remember when I first was exposed to a proven strategy and learned it. It was back in 2019. In sat in London, and it thought this is easy! Later, I have realized it is simple, but might not be so easy. The key takeaways from Mark Douglas book have made me realize why... 

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