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c10 JWBK182-McDowell April 25, 2008 16:11 Printer: Yet to come
88 A TRADER’S MONEY MANAGEMENT SYSTEMThe risk psychology of novice traders tends to focus on the trade out-
come as only winning and does not consider the risk. Master traders in-
stead focus on the risk first and take a trade based on aprobablefavorable
outcome. The psychology behind trade size begins when you believe and
acknowledge that each trade’s outcome is unknown. Believing this makes
you ask yourself, how much can I afford to lose and not fall prey to the risk
of ruin?
When traders ask themselves this question, they will either adjust their
trade size or tighten their stop-loss exit before entering the trade. In most
situations, the best method is to adjust the trade size and set your stop-loss
exit based on current market dynamics.
During account drawdown periods, risk control and trade size become
even more important. Since master traders test their trading systems, they
know the probabilities of how many consecutive losses they may incur, and
what the statistical probabilities are regarding drawdown and their system.
This knowledge enables them to resist the temptation to either give up
or to try and get even with the market. They are more likely to maintain
an even keel and reap the benefits on future well-managed trades. This risk
psychology and confidence takes time and experience to develop.