Risk is everywhere. From leisure activities, like renting a paddleboard, skydiving, or taking your kids to a trampoline park, to driving a car, opening a retail store, or eating food from a sketchy restaurant.
Often these risks exist in the background. We sign waivers without looking closely, and accept that sometimes shit does happen.
But you’ve made risk your business.
In trading, poker, and golf, risk is built into the fabric of your decision making. No risk, no reward. You know this and yet there are times where an aversion to risk alters your strategy and undermines your potential.
You’ll see traders make mistakes like not letting a winner run to avoid the risk of it going against them, not building a bigger position when they have a lot of conviction because they fear it will blow up again, or avoiding a trade with a slightly higher risk/reward because it seems like a gamble. As you’ve learned already, mistakes like these are really signals.
Poker players know this feeling when they fold strong hands in high variance spots, rather than playing to win. Big moments create a lot of tension and pressure to get it right. Attempting to protect yourself from losing money, you can save yourself temporarily but cost you in the end. While you’ve preserved your stack, being aware of backing down can cause you to overreact and play more aggressively, or internally tilt for making a clear mistake.
Golfers experience it when playing too conservatively–playing too far away from trouble that might get them into trouble of another sort, or doesn’t provide the opportunity to improve or lower scores in the long-term. You may struggle to trust a change in your swing to avoid the risk of embarrassing yourself or posting big numbers. Both prevent you from gaining the reps you need on the golf course to cement the change.
Remember, you’ve already determined a strategy that accounts for the level of risk that fits your temperament and situation. Risk aversion goes against that and reduces your chance for profit and success, while increasing turmoil and chaos, widening the gap between your potential and your results.
The Function of Risk Aversion
The Spitball examples I’ll go through all come from struggling traders, but poker players and golfers will feel some sense of shared experience. While performance environments vary, the general reasoning for why this exists is common.
To make progress, you need to understand the function that risk aversion serves: protection. What are you protecting yourself from? What are you trying to avoid? Let’s take a look at a few examples to examine this more.
Scenario 1: I have a good profitable strategy, I have been forward testing it every day for over a year between the London and NY sessions. But when it comes time to execute a trade, I don’t, I always look for excuses in my head “what if” (it comes to another zone, etc.) even though I know it fits the plan. I don’t take trades and it’s killing me in the head.
My sense here is you are trying to avoid the pain of underperforming and feeling like you wasted your time. Logically you know that this strategy is ready for the live market, but you’re unwilling to take the chance that it could fail.
By protecting from the risk of failing you’re also protecting yourself from the opportunity to succeed. The long-term risk of not executing your strategy is far greater, assuring you fail long-term.
Or, you choose to take the risk at the expense of learning more about how your strategy needs to evolve, facing hardship and the challenge to upgrade it. Short-term pain, but it gives you the option for long-term success.
You can play out the “What If’s.” All the excuses in your mind reflect areas of uncertainty. Risk aversion, anxiety, fear, all prey upon uncertainty. By actually answering the question “what if I trade this setup and it loses?” you begin to create certainty–in the strategy, in your risk management and sizing, in yourself in being able to understand and handle the situation.
Creating certainty around these questions will reinforce the strength of your strategy or might lead to small adaptations. Either way, you’ll better trust what you built. This won’t immediately take away your anxiety and fear. Use it as a form of Injecting Logic to help your mind find the stability to act in alignment with your strategy.
Scenario 2: I have always struggled with hesitation in stock trading and it eats at me. I size super low and even then I still hesitate. I think for me it’s a combination of fear of loss, fear of being wrong and I think I’m trying to avoid the feeling of pain from being wrong or losing money. I have been doing this for about a year now and I still struggle with the problem massively and I have no idea what to do here. It holds me back so much. The amount of trades that have gone without me is absolutely insane. I have tracked everything I have hesitated to take and I would be profitable if hesitation didn’t hold me back.
The persistent in-the-moment hesitation, despite scaling down and reducing capital risk, hasn’t moved the needle much, which tells me you are dealing with something deeper. My suspicion is that you are dealing with some perfectionism, knowing how much you could have made from perfect trading is evidence, plus it makes the pressure worse.
The advice from Scenario 1 is probably insufficient because the flavor of risk aversion has wider significance. Your expectations and desire for control are more intense. You may be bringing some personal issues to this endeavor, perhaps some built-up self-criticism, resentment, and accumulation of emotion that leads to lack of confidence in your strategy or yourself.
If you don’t have confidence in yourself, how can you believe in something you’ve defined or created? That lack of confidence taints the whole strategy and makes it feel less reliable, and thus riskier.
You can chip away at this problem by taking a “suck less” mentality, but it’s going to be a real-time battle until you start to gain clarity on the deeper flaws or issues you’re facing and have made some progress.
Look at the next 2-3 months as a trial. Take monetary results out of the picture and use it as a chance to learn and grow on the mental, emotional, and technical sides. Develop your strategy more. You would never go to a doctor who only completed one year of medical school. It’s ok to be an infant, but maybe you are trying to run before you crawl.
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In a vacuum, evading risk isn’t wrong and at times will work out in your favor–the stock tanked right after exiting, your opponent had the nuts, you missed the ball on the green. But playing it overly safe to avoid bad outcomes means you’re guaranteed to underperform in the long- term.
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