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This may be true -- however, professional prop traders all have a risk manager. To size up, they have to get authorization from the risk manager. The risk manager also sets daily loss limits. That is, the firm does not simply rely on traders fixing their problems -- they enforce it with software control that says "you're done for the day" ... and this is for traders who fall into the 'professional' category. So, a broker-enforced loss limit is absolutely a good idea, even if you have gotten things together mentally.
@josh, I think we're talking about processes that sound similar but have fundamentally different purposes. In the first case, the subject is traders who literally cannot control themselves - which would almost certainly not be the case with professional prop traders. The risk manager is not trying to crowbar a trader's emotional flaws; he's enforcing limits to protect the hedge fund from unwarranted risk as the company (and not the trader) sees it, and serve as the backstop to prevent criminal behavior as well as anything else that falls outside the rules. It's a complete separation of opposing imperatives, with the trader on one side and the risk manager on the other - which is not possible in the case of a trader who risk-manages himself.
In fact, we actually know what happens when you combine those roles in the professional world. Société Générale and Jérôme Kerviel, anyone?
Again, I'm not saying that my warning applies to everyone. But - as we know - the easiest person in the world to fool is yourself. And that's a risk that's always worth considering.
Thanks! That's what I was going to say. There are also some well capitalized individuals who choose to clear through a prop firm so that they get the benefit of the risk management team..
Sometimes trading events and our unconscious reactions to them can redirect the energy (glucose and oxygen) from our rational brain into the limbic system (monkey mind) or reptilian brain. This can lead to disaster. I'm sure many traders have blown up after being profitable for many months or even years.
I have first-hand knowledge that this point is not correct. I'm friends with a risk manager in a prop firm and he's told me many stories about having to call traders and tell them to get out of their positions or he would have to do it for them. Loss aversion is a powerful thing, especially when the monkey brain takes over.. The goal is to make sure you stay in the game and don't let one bad day end your career or set you back immensely. There are many stories of these blowups happening to pro traders.
I'm afraid you don't (your conception of the term "first-hand" is patently wrong.) What you do have is a case of a risk manager doing his job - as you say, "tell them to get out of their positions or he would have to do it for them". That's not necessarily - or I would presume even often - the trader being emotional; again, the trader's conception or tolerance of risk is not the same as that of the fund as represented by the risk manager.
Example: a trader who has a perfectly rational conception and tolerance of risk at, say, the $10M level - but has not yet reached that level of allowed risk by the fund. The trader may, from habit, put on a position that is too large per policy - but this has nothing to do with an emotional flaw; simply a mistake for which the risk manager is the backstop.
All of that granted - and all of those stories are the ones that are going to stick in your and everyone else's mind. What you're NOT hearing - classic case of filter bias - are the stories of thousands and thousands of traders who are going about their day calmly, quietly, doing their jobs within risk parameters and never hearing from the risk manager.
P.S. I will also note that this is a side issue that has little to do with my original point: trying to impose mechanical risk management on yourself as a "cure" for lack of self-control is likely to be futile for many people. We can dance all over the place and pick at imperfect semantics, etc., but that point remains.
There is a seminal book called Flow: The Psychology of Optimal Experience by Mihaly Csikszentmihalyi.
This book belongs besides Thinking: Fast and Slow by Daniel Kahneman.
Flow is about those times when you are just in tune with whatever you are doing. Your tasks are challenging but not impossible. Your skills are being stretched but not beyond reach. Concentratation is high but not overly causing frustration or lacking causing boredom. You can almost watch yourself as your movement just flows from from a place of deep understanding. Time seems to not exist or to freeze or slow. You feel this is where you belong in this moment... forever...
This book takes a scientific route to explain the root of HAPPINESS.
And happiness, contentment and confidence are all traits as far as I can tell are prerequisites for long term successful trading.
We have all been IN THE FLOW when trading. This book explains that experience.
So my friend who manages risk has told me that sometimes some of their profitable traders do stupid things like adding to losers and refusing to exit with losses as trades move against them. This is quite common in the trading world from what I've heard. There are stories about this in the book One Good Trade and other books on trading. I acknowledge these may not be the "seasoned" veterans who have been trading many years and are consistently profitable.
I hear your original point that fixing the issue is the solution. That's obvious. The idea of the 'forced daily limit' is not a replacement for improving their discipline. The fact that a trader could respect their rules and limits for weeks or months shows that they are using their focus and intention. (as opposed to someone gambling having wild p-n-l swings everyday) However, this is quite common for "risk seeking personality" people to struggle with managing their limits at some point in their career.
Some rare individuals can stay completely rational everyday, week after week, month after month while risking hundreds or thousands of dollars a day, but that is extremely uncommon for most people There is a very good reason why traders at prop firms usually have access to trading psychologists and some of the best work with them regularly. In these moments of irrationality if the monkey mind takes over then limits and rules can be thrown out the window.