Uncertainty and Risk in Short-Term Trading

Trading and risk go together. Short-term trading denies the trader the strategy of minimizing risk by holding a position over a longer time period. Short-term traders must learn to use momentum and volatility. Volatility can force short-term traders to become scalpers. I know; often I am one of them. However, the scalping, in turn, causes a lot of "noise" in the market. When enough people are scalping short-term, the market becomes full of noise. At that point, prices begin to fluctuate rapidly and risk is increased. In that respect, scalping can work against short-term trading.

All of us have a built-in aversion to risk. Traders, if they can still pull the trigger, have no problem entering into what seems to be a sure win — but when it comes to a trade with a clear possibility of loss, they hesitate. Traders in general don't like taking losses, and will do anything to avoid taking them. They will take even greater risk in the hopes of avoiding a loss. We see it all the time: a trader holds onto a trade while the losses continue to mount. They will pretend that the losses aren't really there. Rather than realizing a loss, they stay in the market and hope they will not be wiped out. The ultimate manifestation of this is seen in the dead accounts; accounts that don't trade, which amount to money in the billions held by brokers, simply because the trader leaves the money rather than close out the account and admit defeat. There is always the "hope" that some day, sometime, they will trade again. The State of Illinois gets rich from those accounts, because after a certain number of years they have the right to confiscate them.

If you are going to be a professional trader, you cannot avoid risk and losses. They are simply a part of the business of trading. You don't have to learn to love them, but you do have to learn to accept the fact that they are a reality of trading, and work at disciplining yourself to keep them to a minimum.

Welcome to the forum Joe and thanks for the insightful posting.

This is a very similar theme to something that Mark Douglas wrote along the same lines in his book Trading in the Zone. On page 102 (Hardback Edition 2000, published by NYIF) there is a section called Paradox: Random Outcome, Consistent Results.

He goes on to say "...at [the micro] level, you have to believe in the uncertainty and unpredictability of the outcome of each individual [trade]..."
"...at [the macro] level, you have to believe that the outcome over a series of [trades] is relatively certain and predictable..."
(He is actually talking about Blackjack in his analogy in the book so I substituted trading back in there.)

Coming back to your point Joe, "...you cannot avoid risk and losses. They are simply a part of the business of trading." I believe that helping a trader accept a loss on one trader is achieved by focusing the trader on the bigger picture.

In fact: Could you make the loss a "happy" experience by adjusting your attitude such that a losing trade can be "ticked off" as one of this week's/month's loses and we can move on to a series of trades that will ultimately end up as a profitable collection?

Traders in general don't like taking losses, and will do anything to avoid taking them.

Lot of truth in that observation !

I view the progression from new trader to consistently profitable to ultimately a professional trader as a series of levels or phases. One of the first levels is to develop the ability to take a loss without suffering psychological harm or discomfort. To experience a loss with the same emotional energy as a win. Joe implies the trader must accept losses are part of the game, I will go further and state that the trader needs to expect a loss with equal emotional energy as they expect a win. This brings us back to the point DT makes in his quote from the Douglas book... its a multi-dimensional problem, the probability of a single loss on any given trade and the longer term probability produced by a series of wins and losses over time. The concept being, stay focused on the long term probability and outcome of a series of trades taken over time (ie. follow and trust your trading plan), and do not over emphasize any single event (individual outcome: win or loss).