What does 'risk' really mean in trading? Overcome these 2 points and turn losses into profits


The first thing a trader must do is control risk, seeking profit amidst the risks. Moreover, risk management is inseparable from an individual's actual competence, highlighting the importance of inner strength.

What is internal strength? It is the ability to deal with the contradictions between one's own subjective consciousness and the subconscious.

As the name suggests, risk management involves the management of risks, including the early warning, assessment, and response strategies for risks. The first step is to recognize risks, which I divide into two main categories: market risks and human nature risks.

Market Risks

Entering the market inevitably means taking risks. Flying can lead to air disasters, but it allows for quick travel. Driving may result in traffic accidents, but it offers efficiency in travel.

Let's distill this further: flying—air disaster or quick arrival; driving—traffic accident or efficient travel. What about trading? Entering a trade—loss or profit. Risk and reward are two sides of the same coin, or as it is said, gains and losses come from the same source. Therefore, face risks without fear, but give them due attention.

Essentially, risk management is about what happens before and after taking risks. It must have an early warning system, such as analyzing the possible directions and market levels of major foreseeable risk events beforehand to be prepared.

For example, caution is advised in risk warning after the market starts paying attention. The Scottish independence referendum in the fall of 2014 caused the pound to plummet by 600 points, only for it to rebound due to reduced expectations of Scotland's independence, leading to a 250-point drop on the day of the result (buy the rumor, sell the fact).

Analyze the potential outcomes of significant risk events before they happen, and better miss out than act recklessly, engaging in an unprepared battle.

So there arises a question, we can plan for known risk events, but what about the unknowns? No one can predict them in advance, and managing funds correctly is the way to go. There are always those who brag about how much they've won and how accurate they are, but if we focus only on the number of times we're right, it's going to be a long road.

95% of people in the market lose money, taking small profits and holding on to losses, ending up with a negative expected value and ultimately losing money. Gaining profits is not important; what matters is the profit-to-loss ratio. It does not matter how many times you are right or wrong, but how much you earn when you are right and how much you lose when you are wrong.

About position sizing, as for Forex trading. This is a method for the lazy: the initial position should not exceed a leverage of 5 times (adjust according to one's capital amount and tolerance), and any subsequent increases in position size through profit should not exceed 10 times leverage. According to the 3:3:2:2 or 5:3:2 rules, you can open positions, but you cannot increase positions on a losing bet.

Some may ask, what if I build positions against the trend in stages, isn't that also increasing on a loss? As you said, but you have to understand the prerequisite—if your initial position was only 1-2 times leverage, of course, you can continue, because you meet the prior condition of not exceeding 5 times leverage initially, and then you can add 3-4 times the leverage. Strictly speaking, unplanned increases on losses are forbidden, and the plan must comply with risk control rules.

When it comes to stop-loss points, it means determining the maximum single trade loss you can bear before entering the trade, setting the lower limit to create profit opportunities for others. The interview last time questioned how to deal with sudden risk events in the market?

It's quite simple, at that time, there are only two situations: either hitting the stop-loss or not. Unanticipated risk events are still within the pre-set risk control rules. Regardless, wait patiently for the next opportunity. If the position is not closed, decide whether to continue holding or to close the position based on market conditions.

It's worth mentioning that setting a stop-loss does not mean doing nothing. Some friends get hit by stop-loss until they can hardly bear it. Setting a stop-loss must comply with risk control rules, and it's not meant to be hit; it's to prevent sudden risk events and to cut losses when you misjudged the direction or you were right about the direction but wrong about the timing of entry.

The frequent breach of stop-loss points is definitely an issue with the reliability of the stop-loss point, and improving its reliability requires effort in technical analysis, also, enhancing the time structure when setting a stop-loss point. Daily support and resistance levels are more reliable compared to the 1-hour levels.

Once set, a stop-loss point should not be easily moved, let alone canceled. Therefore, make sure to plan carefully before entering a trade. When the opportunity arises, act quickly; if not, hold back.

Human Nature Risks

First, let's be clear on one point: we are humans, and thus we have human limitations. Our eyes can only receive visible light, a simple example, but it's just a small part of the electromagnetic spectrum.

So, is seeing believing? If this statement is true, then what is the premise?

What if we were born in North Korea? The limitations of our senses are hard to change due to innate restrictions, and our thinking is not only influenced by innate factors but also by the environment. Everyone has a unique growth experience, but limitations are inevitable. Our brain's world is not the real world. Thus, it is important to understand our limitations, stay humble, and constantly reflect on ourselves.

The risks from human nature are actually much more frightening than market risks. Blow-ups and significant losses are mainly due to these mistakes. When making money, what makes you run? Who else could cause someone to despair when losing money? The fear of losing money and rushing to close positions is driven by fear.

Holding on to losses, hoping the loss can be made up for. Occasionally, this might work and even turn to profit, but making a mistake just once can cause losses to expand continuously until they exceed the psychological limit, forcing you to close positions or even blow up. Greed, hopes, and arrogance can all lead to significant losses. In terms of trading, there are several stubborn issues:

The first major issue: stubbornness.

In interpersonal interactions, people encounter situations where they meet someone for the first time, and the first impression lasts a long time, fundamentally shaping future interactions. Is this rational?

It's actually an obsession. In trading, from the beginning, liking to follow a certain guru, idolization overflowing. One day, the guru expresses pessimism about the future of the Eurozone, not very optimistic about the Eurozone's future, nor the euro’s future.

The result is without second thoughts, neglecting stop-loss and profit-taking, how could the guru be wrong? This leads to paying tuition fees over and over, also an obsession.

Similarly, someone studies fundamental and technical analysis for N years, one day through various methods deduces that the Euro should be shorted, then opens a short position waiting to profit, but shortly after, finds out they were wrong. The Euro rose 500 points? The theory failed? I have dedicated so much to studying these theories, how could I be wrong?

Continuing to add to the short position only to see the losses grow bigger and more exhausting, a few months later, the Euro falls significantly. Usually, stubbornly holding one's view without observing the market's reaction is clear. Being right but acting wrongly is common. Can we solve the problem of stubbornness? Yes.

In college, Soros had a mentor named Karl Popper. The question of falsifiability was one of the most influential ideas on Soros.

In trading, it means no matter what opinion you hold, bullish or bearish, you must understand clearly that any opinion is a judgment based on your logic, which is an assumption. If the assumption is proven wrong, then it's wrong; if not proven wrong, it can only mean it's not wrong temporarily, but it could be proven wrong at any time.

If you truly understand that your judgment is just one of many assumptions in the market, you won't easily fall into the trap of clinging to your views. In a world of clinging, all views supporting your opinion are amplified, all opposing views are selectively ignored, and all unconscious viewpoints are ensnared. A specific moment might earn you a large sum, but in the long run, making a mistake once basically means returning to square one. Always reflect and guard against clinging.

Some might ask, since opinions are hypothetical, can I use throwing dice as a basis for entering trades? First, understand that such opinions are based on personal logic, which inevitably has its limitations. But your logic and market logic are connected, not causal. Remember the Everbright Securities' mistaken order incident?

The stock index suddenly skyrocketed, some said it was the national team entering the market, others said the Chinese bull market had begun. What really happened? In fact, Everbright's quantitative system had a glitch, magnifying the trade orders by 100 times.

Knowing the real situation and looking back at the claims of the national team entering the market, is it laughable? If it hadn't been investigated, what then? Are there still some who firmly believe the national team had entered the market?

Therefore, please understand clearly that this viewpoint is merely based on a hypothesis generated from personal logic. Do not vainly equate it with market logic. Sometimes, results produced by personal logic may coincide with those produced by true market logic, but understand this is a connection, not a cause-and-effect relationship.

At the same time, we should also continuously refine our logic to make it associate with market logic. It’s often said to focus on the main contradiction, indeed. To understand that opinion is a hypothesis, we must constantly remind ourselves not to relax.

Respect the market, remember the market is always the most important.

The second major issue: Fear of loss and gain.

Do not get too excited or depressed over minor wins or losses; in battle, the final outcome matters, not temporary successes or failures. Beware, every move must be consistent with the system to execute, not based on impulse or arbitrary decisions. Don’t be too concerned about small gains or losses if you're following the system, and don’t let a single result affect your mental state or justify impulsive or arbitrary trading.

When we propose a hypothesis and trade based on it, entering the market leads to both gains and losses. At this moment, one might not remain calm, as the heart fluctuates with the ebb and flow of unrealized gains and losses. Still that playful market, still that same trade, so why does it feel like there's a little alpaca running wild inside?

The essence is fear. With unrealized gains, one fears losing profit and decides to close positions and leave. In the face of unrealized losses, one fears the loss becoming real, holding on hope that the loss decreases or returns to profit, is fear, and is folly. The market remains playful, and most will lose money, indifferent to your rises or my falls. To agonize over this post-entry is laughable, but don’t laugh; we've all been there.

Before entry, you hold a bullish or bearish view and enter the market accordingly. After entry, you are tormented by various temptations, fear, greed, persistence, everywhere lies the abyss of human nature. How to solve this? Transition from dualities, from bullish versus bearish, gain versus loss, to a stable trading system. Indifferent to being bullish or bearish, focused solely on executing the trading system.

Regardless of being bullish or bearish, gain or loss, focus on executing the trading system. Small gains, small losses, big gains are all acceptable, strictly avoiding big losses. If correct, hold on, if wrong, cut, use risk control to make money, naturally the system will have a positive expected value.

The Gap Between Knowing and Doing

Some friends might say, it's easy for you to say, but hard to do. Of course, if just speaking could achieve it, who would lose in the market?

Many smokers among us, how many do not know that smoking is harmful to health? But knowing so, what does it change? The result remains: they still smoke. The reason humans demand cigarettes primarily lies in nicotine, a neurotoxin mainly harming the nervous system, as I searched on Baidu.

Some smokers subjectively feel smoking relieves fatigue and revives spirits, a transient excitation of the nervous system, in reality, pleasure induced by nicotine. After the initial excitement, the nervous system then experiences inhibition.

Thus, after smoking, the sensitivity and accuracy of neural muscular responses diminish. An international psychological research institute's survey results showed that the intellectual efficiency of smokers is reduced by 10.6% compared to non-smokers.

Human subjective consciousness knows smoking is harmful to health, so it concludes one should not smoke. And yet, smokers, addicted to smoking, form a dependency, both physically and mentally. Once for relieving stress, irritation, boredom, or a post-meal cigarette, for various nonsensical reasons, they won't hesitate to light up. The conclusion drawn by subjective consciousness that one shouldn't smoke is already disregarded.

In China, we use chopsticks to eat. When using chopsticks, do you consider how much force to use to pick up food? From what angle to poke into meat? No one thinks about it, the entire dining process is natural. Foreigners not used to chopsticks, struggle with Chinese cuisine, saying: “Chopsticks are difficult to use.”

Hence, Chinese people find chopsticks easy to use because we've used them from a young age, deeply imprinted in our subconscious, not governed by subjective consciousness, allowing us to use them naturally.

What is the subconscious? In human psychological activity, the subconscious is a part one cannot or has not perceived, a psychological activity that has occurred but not yet reached consciousness.

Most people's lives are dominated by the subconscious. The power of the subconscious is vast, often referred to as habits, are manifestations of the subconscious. Commonly, one misspeaks, but the subjective consciousness immediately realizes the mistake, but also understand the misspoken words were indeed intended (the misspeaking usually stems from arrogance, selfishness, valuing self over others, etc.)

Some words known should not be spoken, but still are. Smokers know they shouldn't smoke, but likely will. That's entirely a subconscious action.

In trading, many mention being "itchy-handed", knowing it's not the time to trade but still trading, setting rules but breaking them, etc., all boil down to a subconscious issue, or rather, not being skillful enough.

This issue cannot be resolved from the perspective of subjective consciousness, leading to intense regret after impulsive trading, often blaming oneself. Soon after, another instance of impulsive trading occurs, continuing the cycle of regret. Impulsiveness—regret—impulsiveness—regret—self-slap—continue impulsiveness

Returning to the definition of the subconscious, it's the process of psychological activity, things that have occurred but haven't reached consciousness yet. Therefore, looking for answers on the level of consciousness is destined to be futile. In my view, the relationship between subjective consciousness and the subconscious, subjective consciousness is the general, the subconscious a vast army.

And can the army fully carry out the general's will, can they still act according to the general's rules when the general dozes off? It requires continuous practice, constant refinement. Or as they say: the skill lies beyond the poems.

Refinement must be all-encompassing, starting with personal cultivation. In handling relationships, there are two manifestations, one is the restraint of subjective will, the other is acting very nicely, very positively, which can be pretended for a while, but hard to sustain long-term, eventually, the fox's tail will show.

Why? When the general watches, soldiers behave well, reflecting the general's will. What about when the general dozes off? When the general is in a bad mood? Another kind, the natural radiance from within, genuinely wishing others well, being proactive in actions, not minding losses.

This is the soldiers voluntarily reflecting the general's will, regardless of the general's presence or mood, always the same. This is the natural expression of self-nature, not about enduring or not enduring, always consistent, a manifestation of personal cultivation at a certain level.

Form the habit of exercising, exercising inherently has no superiority, but compared to trading, I recommend choosing solo sports like fitness, running. Trading is a lonely pursuit, and with fitness, running, no need to gather people, one can start anytime.

Benefiting not only physical health. Initially, the discomfort and resistance from insisting on exercise, like laziness, overeating, all resolved together. Over time, cultivating the habit, soldiers spontaneously exercise.

If not exercising, one feels uncomfortable. Maintaining exercise not only yields a healthy body but also strong execution, surpassing ordinary willpower, naturally resolving some persistent issues.

Always diligent, do not let it accumulate dust. Once the general finds an issue with the soldiers, immediately eliminate it.

For instance, some comrades speak harshly, then casually remark, "I am straightforward, don't take it personally." How to understand this? It's like slapping someone and telling them not to retaliate. It's possible to disregard others' opinions, but not to ignore their feelings.

Others' opinions are their output, and for you, input. Language is output, for others, input. Don't dismiss others' opinions so lightly, hurting others, first clarify the relationship.

And so-called straightforwardness is often reluctance to spend a bit more time considering others' feelings. Basically, it's a direct habit from the subconscious, so many areas in life need refinement.

Constantly refine, days become longer, skills naturally improve. And impulsive trading, arbitrary trading, and other minortrading issues gradually disappear.

In battle between two armies, although the general's strategy is crucial, ultimately, it comes down to the soldiers' confrontation. Or to say: it tests the comprehensive quality of traders. If one day, the soldiers can fully embody the general's will, no matter the general's state,

At that time, it is the moment of unity between knowledge and action, any action coming naturally from within, the general and the soldier as one. As Confucius said, to follow your heart's desire without overstepping the line. But don't forget the preceding words, "At seventy". Thus, it is a long-term effort, a long journey ahead, needing constant refinement.

Learning to Rest

Rest is important. Why? When people are physically and mentally exhausted, they don't want to do anything or talk. Every decision we make every day drains our willpower, and when it's overly depleted, we enter self-protection mode to reduce consumption, decisions made in this state are outright rejections or easy acceptances, bypassing thorough thinking, making judgment difficult.

In trading, for example, when fatigued, the efficiency of placing orders greatly reduces, existing orders are not analyzed comprehensively, and positions that are making money are neglected due to fatigue, leading to stop-losses being triggered.

Life, like getting tired shopping in a supermarket, by the time you check out, a lot of gums, rainbow candies, all sorts of sweets, and various small items are placed there, and more often than not, one grabs something mindlessly, because deciding and depleting willpower at the same time, "This is nice, that's good too, I'll not buy this for now, I want that..." by the time of checkout, willpower is almost completely spent, whatever small thing catches the eye is bought without much thought or not bought at all.

In conclusion, I hope everyone can have a pleasant trading experience, surviving longer in this market.

Risk Warning and Disclaimer

The market carries risks, and investment should be cautious. This article does not constitute personal investment advice and has not taken into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at one's own responsibility.

The End


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