Trading and Risk

Trading reveals the truth.  Unlike other occupations, there is no politics.  Measuring performance is objective, not subjective.  There are no referees that can decide the winner.  There are no teammates to blame.  A psychological game.  Like golf or tennis.  You are out there on your own,  you are the one who is swinging.  How do you handle the risk?  That is all up to you. 

The most important aspect of trading is risk.  Its a risk business.  Trading is based off on risk and reward.  Here are the 3 types of traders based on risk. 

Type 1:  Low risk tolerance, low pain threshold, hate uncertainty.  Conservative about money.  

These are people who can't take the uncertainty and the ups and downs of the P&L.  The fear of the unknown.  I know a friend who started trading and within 6 months, he got panic attacks out of the blue.  Needless to say, he was someone who physically couldn't take the risk.  A lot of these poeple are the type who can't sleep when they hold a big position overnight. 

If you can't take the uncertainty, then most styles of trading probably won't work.  Maybe scalping or daytrading lower volatility stocks, but that's probably the most difficult way to make money in this business and the most competitive.  All the money that HFT firms and hedge funds like Renaissance Tech. pour in for research make them the apex predators in the shortest time frames. 

In order to get beyond the safer stuff, this type of person will need to size way down and make small enough bets to the point that the risk is tolerable and there are no sleeping problems while holding positions.  Most suited for conservative long term buy and hold investing.  

Type 2:  Medium risk tolerance, moderate pain threshold.  Somewhat aggressive with money.  

These are you moderates.  They don't have extreme views about investing or money, mostly practical.  Try to treat trading like a normal 9 to 5 job, want and expect steady income.  They can take moderately big positions without sweating it, but if they go all in, they feel the stress and have trouble going to sleep. 

They can be flexible and choose all different styles, but probably best suited for swing trading stocks.  Could be suitable for trading futures if they only use a small portion of their available margin.  

The best level of risk tolerance for longevity in this business. 

 

Type 3:  High risk tolerance, high pain threshold.  Gambler type, aggressive.  Risk seeker when it comes to money.  

This is the most dangerous type of person to enter trading.  They are the most likely to blow up and get taken out of the game before they know what they're doing.  Big wins and big losses.  Usually have poor risk management, and don't have a long term view about the business.  No patience, always in a rush to make money.

These are your degenerate gamblers in the market.  The YOLO traders.  The options punters.  The WSB crowd.  The ones that want $500 margins to trade ES.  The ones who treat the market like a casino.  These are your free swingers.  Don't like getting walks.  Don't mind striking out.  They hate taking pitches, always looking to swing and hit the ball out of the park. 

Usually very stubborn and unwilling to take a loss.  Diamond hands.  Charcoal brains.  

Probably best suited for daytrading at a prop firm where they aren't allowed to take overnight risk.  At least when they blow up, its other people's money and not theirs.

 

Used to be a type 3 trader when I was young and dumb, a risk seeking trader, but as I've gotten older, and my testosterone has declined, I'm probably half way between type 2 and type 3.  Probably more risk tolerant than most traders except the WSB/Yolo/diamond hands/$500 ES margins crowd.   What type of trader are you? 

Sold most of my SPX long this morning, will sell the remainder either later today or tomorrow.  Was expecting a thrust higher on Monday, but that down day changes the picture.  Got a little bit too excited about the long side on Friday, thinking V bottom and straight line towards SPX 4200.  Expecting a tight consolidation of this bounce for the next few days and then another pullback to retest the SPX 4060 level, the closing low on 5/12.