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!

From Flat to Flat

As intraday traders, we close positions and let our accounts rest while we wait for the next setup. We’re ‘flat’.

This is important. When we’re struggling, we may need a prolonged period where our accounts are flat. In order for them to reset.

This same concept is true for each of us, as operators of our system. We need to be mindful of where we are mentally.

And be careful to trade from flat to flat.

Now, our accounts can be flat while we are not. And the problem is that often, we come into the market with overnight baggage.

This is not new information to this crew. That is for sure. However, I’ve found the concept of ‘flat to flat’ to be a simple and easy way for me to check myself.

Some questions:
Have I spent enough time flat to be able to take full advantage of the next trade?

Do I have a feeling of irritation, frustration or anxiousness this evening?

If I am feeling some mental or subconscious thought, anxiety or frustration, how can I seek to Sort that out before I get to my desk?

Our plans are of course important but we need to make sure we’re ready, mentally and physically, to run our race tomorrow. Peak mental shape. There is too much at stake.

While our accounts rest, let’s make sure we’re flat before the morning. Ready to crush this week, which is sure to be wild.