In some recent trading psychology posts, we explored how our attitude toward failure and our locus of control can impact our effectiveness. In today’s post, we are going to talk about how our attitude toward risk can influence our forex careers. It is worth mentioning that we can almost guarantee to eliminate the risk in Forex if you start trading using no deposit bonus in forex. One such bonus is XM no deposit bonus.
Many of us have been thinking about this topic more explicitly since the pandemic than we did at times in the past. In fact, our behaviors during the pandemic have given us a new lens through which to learn about how we perceive and manage risk.
Generally speaking, we can view our attitudes toward risk on a spectrum with risk aversion at one end and risk-taking at the other.
- Risk-aversion: If you are toward this extreme end of the scale, you might go out of your way to avoid ever exposing yourself to risk if you do not have to. Your core belief may be, “the best gamble is not taking one at all.”
- Risk-taking: If you fall toward the opposite extreme end of the scale, you might embrace risk-taking, whether because you believe it offers practical value or because you thrill in the emotions of taking a risk.
Most traders fall somewhere between these two extremes. On the whole, however, the population of forex traders likely tilts toward the risk-taking end of the scale, since trading is a risky business.
Pros and Cons of Risk-Taking
The largest benefit of embracing risk is probably the fact that it exposes you to more potential opportunities.
There is also a psychological benefit in that you may feel less anxious when you are participating in a risky venture such as forex trading.
The biggest drawback to embracing risk is no doubt the fact that sometimes, it can go too far. If you take risks too easily, you ignore the messages in your brain that are telling you that a potential payoff may not be worth what you could lose. You might take a lot of trade setups that are not that likely to pan out, which could adversely impact your bottom line.
Pros and Cons of Risk-Avoidance
The advantage of avoiding risk is, of course, that you might steer clear of potential losses. If you can avoid losing a penny, you do not need to earn a penny just to get back to square one, and then another penny to make a profit. The more losses you rack up, the more of an uphill battle you are fighting to make any progress forward.
That said, extreme avoidance of risk is psychologically crippling, especially for a trader. But in truth, all of life involves risk, even getting out of bed in the morning. If you are terrified of risk, you will be extremely anxious.
There are also numerous opportunities that simply do not exist without risk. You cannot become a successful forex trader if you are not willing to risk becoming an unsuccessful one. Even though this is a statement of the obvious, it is worth repeating to yourself if you suffer from great risk aversion.
Where Do We Learn Our Attitudes Toward Risk?
While our attitudes toward risk may come from many different sources, the primary among them is usually our parents and others who raised us.
Some research has shown that when children grow up with parents who are averse to risk, there may be a negative effect on their test scores. They also may be more likely to shy away from higher education.
We might also pick up attitudes toward risk from cultural influences such as celebrities we follow or shows we watch.
Sometimes, formative life experiences can have an impact as well—as does how we cope with them. For instance, someone who makes a major mistake their first time out driving and then avoids driving might be scared to get in a vehicle for the rest of their life.
By contrast, another driver who likewise screws up big when they are new to it, but who then immediately gets back in the car to try again, might prove to themselves that they can be competent and safe. That person may be less anxious and averse to risk in the future.
How We Assess Risk Matters
Another facet of risk management worth discussing as we explore our attitudes toward risk is risk assessment.
Two individuals looking at the same opportunity might gauge the level of risk involved quite differently from one another.
There is a lot of emotion and subjectivity that goes into any given risk assessment. Individual factors play a prominent role.
Whenever we decide whether or not a risk is worthwhile, we weigh our feelings about the potential payoff with respect to what we could lose.
Our underlying attitudes influence us in this process. If we are risk-averse or anxious people, we may overestimate how likely adverse outcomes are. The reverse is true if we are risk-takers.
Those incorrect assessments may then feedback on the logic that underpins our attitudes in the first place.
That said, sometimes it comes down less to under- or overestimating certain possibilities, and more to do with how we feel about those possibilities.
We might acknowledge that a particular outcome is unlikely, but still feel that risking it at all is not worth it.
Taking a Balanced Attitude to Risk in FX
Because extreme avoidance or taking of risks can have negative consequences for our account balances, it makes sense to try and approach risk management in forex with as much balance as possible.
- Identify your feelings toward risk. If you do not know whether you are a risk-taker or a risk-avoider, you will have very little awareness of what is going through your mind as you choose to take a trade or skip it. Try and figure out what your attitudes are and how they are driving you.
- Question your attitudes toward risk. You may want to question whether your attitudes are realistic or helpful to you, especially if you fall toward one of the polar ends of the spectrum rather than near the middle. Ask yourself where you learned them and how they have influenced your life to date. What might be some more realistic assessments of the risks you take or avoid?
- Acknowledge that forex is risky. Never make the mistake of thinking forex is a low-risk activity. Even if you are following best practices, you are taking a risk on every trade.
- Manage your risk. Just because you are taking a risk when you trade forex, that does not mean the risk has to be uncontrolled. You can, for example, control the exposure of your bankroll by following a money management plan. You also can increase the likelihood of winning by following a working strategy.
- Run tests. Running tests gives you a way to make a more objective, quantified assessment of the risk of your trades. If you conduct a backtest that shows a high win rate on a trading method, you have a good, rational basis for taking trades following that system’s rules.
- Set rules and stick with them. Whether you tend to avoid risks or pursue them, setting strict trading rules and following them closely can help you rein in your impulses and avoid over- or under-trading.
- Improve your impulse control. While you might think that poor impulse control is something you are simply stuck with, there are things you can do to improve. As you do so, it should become easier for you to make rational choices when trading.
- Come up with ways to power through. If you are deeply risk-averse, trading forex can be difficult emotionally. Some of that might reduce if you can figure out why you feel the way you do about risk and start replacing some of your underlying distorted beliefs. But some of that emotional resistance might still remain. If so, try to come up with ways you can motivate yourself to push through your risk aversion and keep trading.