Risk/reward is set in concrete. Nothing in trading, with the exception of the process, is set in stone. I have seen that stone sink many peoples trading careers. Risk/reward is as much of a filtering process as it is risk management. We look at market in terms of volatility, it keeps us out of slow times but it can dry up quickly. If it does we get out before the “reward”. If we see it expanding and everything lines up we will get out after the “reward”. We are always adjusting to the situation.
The market often rewards bad behavior. You exit a stock because your stop is hit. You are okay with this because you followed your plan. The market then immediately reverses. You begin to think, “If only I stayed with the position.” The next time the market goes against you, you decide you are not going to get tricked again. This time though, the market does not reverse and what started out as a small manageable loss is now huge.
The market will give you loss after loss forcing you to abandon a methodology right before it takes off without you. On the flip side, the market will lull you into a false sense of confidence. You trade larger and larger, taking on excessive risk. You print money until your risks become so excessive that one or two bad trades wipe you out.
Learn from the market, but realize that sometimes it can be a lousy instructor.
Every market move is a reason to trade. There are so many opportunities that there is no reason to create one. Once again, this is where the selection process comes in play. Staying on the sidelines is a trade. Being able to separate what happened from how you felt is important and makes it easier. Missing a move is part of being a trader, you can get over it now or later.
The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading… I know this will sound like a cliche, but the single most important reason that people lose money in the financial markets is that they don’t cut their losses short.”Victor Sperandeo
Traders take big risks. Bad traders take big risks. The difference between a retail and a professional is the professional trades bigger taking the same risk as the retail trader. That is in part because a professional sees more of the market and is flexible. They understand what they are comfortable risking and never get beyond that point with very limited exceptions. You cannot run away from the risk, it always reverts to the mean. But what you did before and when it does revert is the difference between profitable and unprofitable traders.
The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.”William O’Neil