risk management in trading Psychology

Risk management could seem straightforward, but ‘psychology’ might not be particularly engaging. I assure you that both of these subjects can potentially expand trade opportunities. For instance, risk management includes more than just the standard topics of leverage, stop loss, and position sizing. Trading psychology not only replicates your actions in the markets but also allows you to assess why and how you made a particular trade or investment successful or unsuccessful.

Given the extensive nature of these topics, I started looking for ideas on how I may arrange this module and what chapters to include, but to my surprise, there needs to be more content relating to these themes.

Of course, a tonne of stuff is available online, but it needs to be more cohesive and consistent. This gives us the opportunity and the responsibility to provide reliable literature on these topics with an emphasis on the Indian context.

  • What to anticipate? 

We are focusing on two primary topics here:

  1.   Risk management 
  2.   Psychology of trading

The methods you use to control risk depend on where you stand in the market. Your risk management approach will significantly alter depending on whether you have one position or many, which is very different from portfolio management.

 Given this, we will examine risk management from a variety of perspectives.

  1.   Risk Management from a single trading position 
  2.   Risk management from multiple trading positions 
  3.   Risk management for a portfolio

I’ll go over the following topics as I attempt to elucidate the ones mentioned above:

  1.   Risk and its many forms
  2.   Position sizing
  3.   Single position risk
  4.   Multiple position risk and hedging
  5.   Hedging with options
  6.   Portfolio attributes and risk estimation
  7.   Value at Risk
  8.   The effect of asset allocation on risk (and returns)
  9.   Insights from the portfolio equity curve

Additionally, we would talk about trading psychology from the viewpoints of both traders and investors. Cognitive biases, mental models, typical pitfalls, and the thought processes that lead you into these traps would be the main topics of discussion. The subjects we will be talking about in this part include the following:

  1.   Anchoring bias
  2.   Regency bias
  3.   Confirmation bias
  4.   Bandwagon effect
  5.   Loss aversion
  6.   Illusion of control
  7.   Hindsight bias

Of course, as we move forward, we’ll expand upon this.

Let’s get started!