There is a number of common human weaknesses that mean it can be hard for us to manage risk. Sometimes, if we are in a vulnerable situation, we can look for one single financial answer such as putting on one big, risky trade. Other times we may struggle to recognise when we are wrong in our trading decision and we keep moving our stop loss further and further away. The impact of not managing risk is profound and we look at some of the impacts below.
- You will stop trading. If you find yourself unable to manage risk eventually you will stop trading. This can be very frustrating for a trader who was managing risk and making money, but in one reckless move loses all their profit and some more. A failure to manage risk is one of the biggest reasons traders quit trading.
- Personal impact. If you lose a significant sum of money, by not managing risk, you will damage your state of mind. You also risk putting relationships with your family under strain if you have been responsible to manage risk for the family.
- You have a big profitable trade, but watch out. Strangely, by not managing risk properly, it can mean you have a very large outsized winning trade. You may feel elated, and so happy. However, watch out! The same reckless behaviour that led to you making a large amount of money can also lead to you losing a large amount of money.
- Stress. By not managing risk your equity will have large gains and falls. This is incredibly stressful to manage if you are seeing significant peaks and troughs in your equity curve. The high stress is unpleasant and living this way over the medium term runs the danger of impacting your long term health.
- Preoccupation with trading. Risking too much can often result in a trade on that you can’t stop checking. Every few minutes you look at the trade, you can’t sleep properly and check the position overnight. Perhaps you can’t spend time with your family properly because your trading is always in your mind. Being passionate about trading is fine, but being preoccupied with your trading is detrimental.