Janice Dorn, M.D., Ph.D.
September 24, 2006Blunder Number 9: Failure To Embrace The True Nature Of Risk
Johnny Knoxville and his team of Jackass2 are back trying to kill themselves in and with whatever manner they see fit. In the process, they grossed 60 million dollars in one week and took self-destructive defiance and voyeurism of risk to yet another level. From zorbing to getting deliberately crushed by a bull, they are out there grinning from ear to ear as they writhe in pain while people are paying big bucks to watch.
We now have the new MTV2 series entitled True Life: I Live On The Edge, where all X-treme activities are revealed, and we can watch as people throw caution to the winds and put themselves in harms way through MOTO-X, BASE jumping, kite boarding a panoply of X-treme sports. The more extreme, the more risk, the more entertainment. Back to the Jackass wild men. Having been removed from MTV due to controverter over the danger to the viewers ( many of whom did not heed the warnings , tried the stunts and were maimed or killed), they have a more powerful and "scary" logo ( human skull with crutches) and yet another warning: The stunts in this movie were performed by professionals, so neither you nor your dumb little buddies should attempt to anything from this movie."
So there you have it: extreme risk couple with intimidation and a challenge to defy warnings.
We see warnings about risk in the markets: There is a risk in all trading, only trade with money that you can afford to lose, there is a risk of unlimited losses in trading futures, and so on. Disclaimers about risk are everywhere, and it is my contention that people are almost oblivious to them. If they were to heed to warnings, few if any would be putting monies into the market. Yet, the number of traders continues to increase, the advertisements for instant wealth and ways to leverage portfolios using options and futures are aired from morning until night and the disclaimers appear in tiny letters under the ads. Where's the risk? What is risk?
How do we avoid being drawn into the siren call of the markets without risk?
The answer to the questions above are follows:
Risk is everywhere in life and the markets and cannot be avoided.
Risk is the intersection of danger and opportunity. In the markets, it is exposure to the chance of losing money.
Risk in the markets involves chance and chance involves odds.
We cannot participate in the markets without risk, just as we cannot live in real life without taking risks.When you trade and invest in the markets, you are actually trading money and beliefs. You are buying and selling risk. As regards risk, everyone gets out of the markets what they want, need or both.
Without going into specifics of the types of systemic and non-systemic risk, the details of the individual and mass neuropsychological aspects of why what and how we risk and the value of technical analysis in reducing risk ( these will be the topic of one of my monthly Trading Wisdoms), I would like you to become fully aware of the presence of risk to your financial and psychological capital. You can lose everything. As hideous as that sounds, many of you will not believe it. That only happens to someone else because I am too intelligent, educated, street smart, careful, etc. It can't happen to me. Until it does. Risk is addictive and is infiltrating us in subtle and subliminal ways. In a simple sentence, risk is risky and risk gets rationalized.
95% of traders lose all of their capital in the first year. Why? Because they do not appreciate, manage and embrace totally the concept of market risk. Just as in those who watch and attempt to emulate the stunts on Jackass or any X-treme activity, there is a continuum between overconfidence and self-criticism which contributes in a constantly-changing manner to the capacity for assuming risk. Additionally, there is likely to be a disconnect between the actual capacity for risk and our individual behavior at that time. This is due to the way that we allow our thoughts about risk and the subsequent risky behavior to be over-ridden by the emotional flood which enters our brains during actual trading. It also has to do with ones state of being at the time of trading. The more healthy, stress-free, exercised and balanced one is in life outside the markets, the better one is able to embrace and manage risk. The more depleted, sleep-deprived, chaotic in our lives and relationships, the more we put ourselves at the mercy of the markets by throwing caution to the wind and risking for the sake of feeling better, getting even, trying to prove oneself and a variety of other neuropsychological mind games we play with ourselves and others.
Risk is risky and risk gets rationalized.
The best thing you can do right now is make a conscious decision to embrace the risk and learn to use it positively. In order to do this, you must constantly condition your brain through your subconscious until it entrains. It is your money and your decisions. Never forget that every time you place a trade. Then, prepare yourself for the risk: anything can happen at any time. This is a fundamental market truth. This is the ability to deal with uncertainty and randomness. It is not about how much you risk. It is about embracing that risk and having your whole brain about you so that you can see that the light at the end of the tunnel is, in fact, an oncoming train, and you can get off the tracks long before you are run over.
Disclaimer - I am not a commodity trading advisor. The information on this site is for trading education only. There are no trading recommendations for any one individual made on this site and this information is paper trades for trading education. All trades are extemely risky and only risk capital should be used when trading.
U.S. Government Required Disclaimer - Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.