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The Psychology of Risk in Commodity Trading

InvestorEducation / Trader Psychology Oct 28, 2009 - 03:17 AM GMT

By: Andrew_Abraham

InvestorEducation

Best Financial Markets Analysis ArticleThe psychology of risk in commodity trading is not that often of an issue discussed. I want to share an interview with my colleague Martin Bedick.


Martin Bedick on the Psychology of Risk in Trading

AJ: Martin, one of your main interests has been the psychology involved in commodity trading. What is it about this areas that interest you?

MB: You are not going to believe this, but I actually thought trading was going to be an easy way to make money. It was only after a poor period of trading, I realized I had a problem. Since I wasn’t making any progress, I decided to re-think my approach to trading.
In the original Market Wizards book, there was an interview with Van Tharpe. He was a psychologist that worked with traders, and at that time was working with Ed Sekoyta, one of the greatest traders in the last 30 yrs. After reading this interview, I arranged to attend one of their weekend commodity workshops.

AJ: What did you learn at this workshop?

MB: I learned how important one’s mindset is to trading successfully.

AJ: Could you elaborate for us please?

MB: Sure, as you know, trading is not easy and all traders are going to be presented with challenges on a constant basis. One of my all time favorite quotes comes from Mark Douglas’ book The Disciplined Trader. He states, “Most people like to think of themselves as risk takers, but what they really want is a guaranteed outcome with a little bit of suspense.”

AJ: Are you saying they are not aware of the risk?

MB: No, I am saying that they have not accepted the risk.
Truly accepting the risk in trading, means you are no longer afraid of what may happen. The only thing that is certain in trading is nothing is certain! Once you understand that anything can happen, you will always act in your best interest and protect yourself.
The successful trader is not afraid. Losing traders are always fearful.

AJ: What are they so fearful of?

MB: Most are fearful of losing money. However, some are afraid of their analysis being wrong, and others fear either missing a big move or leaving money on the table.

AJ: So conquering your fears and accepting risk are similar in trading?

MB: Yes, most traders spend vast amounts of time searching for a method to eliminate the risk. We all know this is impossible. Instead, one needs to change their mindset so that they truly learn to accept the risk.
This may be the risk of losing money, the risk of being wrong which can lead to criticism from colleagues or clients, or the risk of missing moves by either entering late or exiting early which could lead to a different type of angst all together. Only then, when one can truly accept all the risks involved in trading, will you become a better trader.

AJ: Thank you Martin, for that glimpse into the psychology of commodity trading today. I believe our readers will find your views both interesting and valuable.

If you have commodity related questions please, feel free to contact me. I will be happy to answer your questions to the best of my ability.

Andrew Abraham
www.myinvestorsplace.com

Andrew Abraham has been in the financial arena since 1990. He is a commodity trading ddvisor and co manager of a Commodity Pool. Since 1993 Andrew has been a proponent of quantitative mechanical trading programs. Andrew's major concern is not only total return on investment but rather the amount of risk that one would have to tolerate in order to achieve returns He focuses on developing quant models that encompass strict risk adherence and correlation. He has been a speaker at conferences as well as an author of numerous articles. Andrew has spent years researching ideas that have the potential to outperform indices as well as maintain fewer draw downs.

Visit Angus Jackson Partners (http://www.angusjacksonpartners.com) Contact: A.Abraham@AngusJackson.com (mailto:A.Abraham@AngusJackson.com)

© 2009 Copyright Andrew Abraham - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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