Major Behavioural Traits of Successful Traders - Respect for Risk and Uncertainty

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Trait 7) Respect for Risk and Uncertainty.

Successful traders have a huge respect for risk, and an appreciation for the dangers of uncertainty. They also acknowledge and work with the subtle difference between the two. Risk is only a small part of uncertainty: if one of my positions is stopped out, then I lose $x being my ‘risk’. Every time I trade, something is ‘at risk’. As a concept, it’s much more self-evident than ‘uncertainty’. Uncertainty itself is much wider: it is impossible to put a value on exactly how the market will behave tomorrow. Some people try and price uncertainty, which they mistake for risk, however, it is hard to truly put a price on uncertainty. This point is admittedly contentious and some may debate the simplistic definitions, however I do believe that attempts to price uncertainty typically end in disaster. People thought they had valued uncertainty correctly at LTCM, and the lessons of this were quickly forgotten as people also thought they had correctly priced uncertainty ahead of the Global Financial Crisis. Top traders embrace risk, and respect uncertainty. They know crucially that they do not know what comes next, and are at best making educated guesses. Successful traders are not gamblers. The only casino game successful traders usually play is poker, and they usually do not see poker as gambling since they have the ability to shift the odds in their favour. In all other casino games, the odds are too heavily stacked against them. There has to be positive expectation of a favourable outcome, not merely an assessment of market direction. Helpful behaviours to support development of this trait:

• Develop a rule base for risk, and assessing it vs reward.
• Plan trades and include risk in trade evaluation.
• Ensure you are consistent in applying the tactics needed to enforce the strategy.
• Evaluate and monitor your performance in risk assessment.