Perceived Risk vs Actual Risk.

Let me get on a soap box for a moment.


Risk is what we do.
I think we all know that. However, it is extremely unnatural. The human emotional response to risk is totally jacked up.

It’s easy to enter and win. That’s a no risk situation. At least your exposure to risk, experientially, is minimal.

Enter the market and lose. Some felt risk there. But not bad. Now do it again. The risk exposure increases. The sensations increase. Emotions heighten.

Four in a row and you’re in tilt.



Risk exposure that is. You now feel as if you are overly exposed to risk when what you had in mind for the day was to put on a trade, win, feel no risk.

But that’s not trading.

So, how you actually handle risk in your life is how you will handle it in the market. The thing about it is, you don’t feel the risk exposure until it’s too late. You’re already in a whirl wind.

Consider this.

In climbing, we have a concept.

Perceived risk vs actual risk.

In climbing, your sense of risk is as you’d expect. When you’re up high, you feel very scared. However, if you fall, you will be caught by the rope.

So your perceived risk is high while your actual risk is low.

In markets, it’s the opposite.

You enter the market with low perceived risk. Before you know it, actual risk of blowing up is breathing down your neck.

Like in climbing, we need to decrease both perceived risk and actual risk. When this happens, we can increase exposure.

Perceived risk is only really reduced through visualization and experience. Both play important roles. There is no way around that.

Actual risk is reduced by safety measures. Loss limits. Trade size, etc. this is your rope.

If you were climbing a rock face and you took a fall. It scared the shit out of you. Would you then cut your rope?

Of course not. You don’t hate your life just because it was threatened.

The same is true in your account. Use the damn rope!