I’m often amused when my non-trading friends tell me that they could never play the markets for a living because they couldn’t cope with the risk. They say things like, “Aren’t you worried you’ll lose it all one day?”, and “What happens if there’s another stock market crash? You could get wiped out!”
These well-meaning but faulty assumptions come about for two reasons. The first is a lack of understanding of exactly what I do as a day trader. The second is a flawed idea of risk.
The thing is, risk is something that is omnipresent in life. Even before we are born, our existence is fraught with risk. From the moment we emerge into the world until the day we leave it we tackle a multitude of risks, some that could endanger our lives, others that may only threaten to dent our egos. We can never avoid risk, but we can certainly manage it.
Anyone who gets behind the wheel of a car is, statistically speaking, putting themselves at immense risk. No matter how carefully they may handle their vehicle, there is always a nutcase out there ready to cause an accident. There’s always a drunk driver, or one paying more attention to their phone than the road, ready to bring about an abrupt and bloody end to your day. Yet even knowing thousands of people are killed on the roads every year, we get behind the wheel without a second thought. A not insignificant number of people are afraid of flying. Some won’t get in a plane at all, others suffer extreme stress until safely on the ground. The statistics tell us we are far more likely to die in a car crash on the way to the airport than we are in a plane crash, but still we evaluate the risk of the two eventualities completely back to front.
I believe this is because driving a car is such an everyday occurrence that we are desensitised to the inherent dangers the same way we don’t worry about slipping on the soap in the shower and cracking our head open. Those who fly daily — pilots and crew — do not tend to linger over their goodbyes longer than strictly necessary because they fear they may never return. Repeated exposure to their environment, and no doubt a hefty dose of training, means they understand that the risk in their profession is minimal — certainly lower than the level of risk a taxi driver is exposed to.
When it comes to the markets, we as traders are not risking our lives. We have nothing to fear from the fatally distracted driver around the next bend. We don’t even have to worry about our employer going bust and our income disappearing overnight. The worst that can happen to us if things go pear-shaped is we lose a bit of cash. To the point we get wiped out? Sure, it could happen, but we would have to be spectacularly bad at our jobs to allow it to.
Take Back Control
Because actually, as traders we have more control over the risks we take than people in many other occupations. Rare indeed is the job where one can choose the maximum level of risk they are prepared to take, yet that is the fortunate position I and other day traders find ourselves in. Provided we have strict money management rules that we understand, good discipline to stick to them, and a sound backup plan for when the unexpected occurs, we can control our financial risk almost down the to cent.
We begin each new day knowing the worst case scenario is that could lose $x. The ‘x’ is a figure of our own choosing. If we reach a loss of that magnitude, we stop, it’s as simple as that.
With fast mobile internet connections and powerful smartphones in our pockets ready to take over should our main trading computer or connection bite the dust mid-trade, we need never fear losing access to our accounts. And even if numerous technological breakdowns should stack up and conspire to keep our fingers from our control panels, automatic stop orders can take over in our absence.
This is why I smile when my non-trading friends tell me they couldn’t handle the risk they think my job involves. I have no commute during which I might crash; nobody can fire me because they’re having a bad day; I’m not going to die in an office blaze because some idiot blocked the emergency exits; I don’t even have to worry about getting food poisoning from the staff canteen. The worst that can happen is that I lose a few dollars. So in the bigger scheme of things, I am subjected to far less risk than those who question my choice of career.