In preparing for my talk on Risk Management sponsored by CMC Markets (see attachment: Art of Trading.pdf), it struck how important a role the subjective aspects are for Risk Management.
Our Vision and Goals set the scene for the driver of our Trading Rules (of which Trade Management forms a part; Trade Management is one aspect of Risk Management) and Money Management Rules. In the latter case, our subjective risk profile defines our trading philosophy; in turn our risk profile dictates the type of Money Management Rules we apply.
In my case for example, I first seek to preserve my capital through the consistent execution of my Trading rules and Risk Management Rules. Only when that safety is secured will I seek superior returns.
This means that sometimes I will forego what appears to be a superior reward to risk because I assess that the probability of success is too low; other times, I’ll exit a trade at break-even or a small loss only to re-enter at a worse off price – because at the time of the exit, I assessed that the probability of success was no longer in my favour.
The approach may not work for every one, but it works well enough for me.