We've always been told to treat your trading like a business. Yet I think many fail to do so. In particular, controlling their risk.
When you look at a prop trading firm, they have dedicated risk managers. If the traders reach their daily stop, the risk manager will assess the traders, take their emotional temperature, and decide whether to give them additional capital to trade with. Same goes if the trader wants to size up. They must have supporting evidence.
Why? I believe it's because they treat it like a business. They don't trust any individual to have the consistency to never succumb to their emotions.
So that begs the question, if the professionals are outsourcing their risk management, why aren't more retail traders doing the same? There are multiple platforms that support it, some platforms have third party tools and I'm sure brokers would be happy to add in a daily stop.
How strong of a business would it be, if the only thing stopping you from blowing up the account, is you?
The following user says Thank You to creamyyy for this post:
This is from the point of a single person starting a business; Most people who attempt to start any business fail at least once and for a lot of people multiple times before finding something that works or finding out running their own business is not for them. IMO any new startup has a high degree of risk. This is what you need (risk) to see if it’s going to work. Plus you don’t know what you know, which leads to failure and learning. Through this pain arises risk management.
To answer your original question as to why more retail traders don’t use risk management I think it depends where you are in your journey. If you make it to the point of making money then risk management becomes essential to keeping your wealth. If your just starting out, your trying to figure out what sticks and risking a lot more per trade because you don’t know any better.
Robert
nosce te ipsum
You make your own opportunities in life.
The following user says Thank You to Silver Dragon for this post:
You're looking at it backwards.
Professionals aren't outsourcing their risk management.
It's the FIRM who is withholding the risk management privileges, and not delegating it to its employee traders. It's the firm's risk, not the traders'.
As a former R&D manager, I can tell you that no business outsources its core capabilities. Otherwise - who needs that business? Everyone can just go directy to the subcontractor... The justification for existence as a business is it's core capability (the "edge").
As a trader, risk management is THE most important thing you do. Your attitude should be to own up to it and claim full responsibility for the most important part of your trading business, not look to alleviate pressure by leaving such responsibility in the hands of someone else.
Yex, the only thing stopping you from blowing up your account is you. That's a good thing. It keeps your mind as the "business manager" on the most important part of your business.
In your example, the trading firm keeps risk management as its core capability, and "outsources" execution to the individual traders.
Think of algo traders as another example: they may "outsource execution" to the algo, but still make their own capital allocation decisions.
The following 2 users say Thank You to ZviTradingCoach for this post:
