The Psychology of Risk: Mastering Market Uncertainty

307 Pages·2002·0.72 MB·English

by  Ari Kiev

The
Psychology
of Risk
Mastering Market
Uncertainty
ARI KIEV
John Wiley &Sons, Inc.

The
Psychology
of Risk
Mastering Market
Uncertainty
ARI KIEV
John Wiley &Sons, Inc.
Copyright © 2002 by Ari Kiev. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
Kiev, Ari.
The psychology of risk : mastering market uncertainty / Ari Kiev.
p. cm.
ISBN 0-471-40387-3
1. Investments—Psychological aspects. 2. Portfolio
management. 3. Risk management. I. Title.
HG4529.5 .K54 2001
332.6′01′9—dc21 20001007197
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
For Phyllis,
with all my love

PPRREEFFAACCEE
Since 1990, I have been helping Wall Street traders master psy-
chological obstacles to trading success and develop strategies for
winning that would sustain them in the face of the uncertainty and
unpredictability of the markets. My first book on this subject, Trading
to Win: The Psychology of Mastering the Markets(Wiley, 1998), presented
a step-by-step goal-oriented program for building the mental and
emotional stamina not only to win but to win on an unprecedented
level. A second book, Trading in the Zone: Maximizing Performance with
Focus and Discipline (Wiley, 2001), examined specific techniques for
achieving and sustaining peak performance levels by entering into the
zone—a focused state of concentration and goal-directedness.
The present book provides further explorations into the psychology
of trading to win, focusing in particular on the appetite for risk taking,
on ways of modulating and managing risk, and dealing with some of the
pathological patterns of risk taking that often incapacitate traders. What
is it that allows some traders to assume risk with considerable impunity
and translate their analyses into action, whereas others with equally
good understanding of the companies they are analyzing and the stocks
they are trading are inhibited from trading as effectively as they can?
A willingness to take risks, set goals, persevere, and not be influ-
enced by the opinions of others is critical for success. What distin-
guishes the best traders is their willingness to acknowledge their
feelings, to ask for help, and to keep monitoring and adjusting their
performance in light of specific trading objectives. Traders who
“trade not to lose” don’t take enough risk or trade recklessly and
v
Preface
emotionally when in drawdown and jeopardize their capital. Trading
success requires you to manage your risk objectively to be able to cut
losing trades and stay longer in winners. To do all of these things well
requires an appetite for risk and risk management and the ability to
handle such distinct tendencies as perfectionism, decision paralysis,
hoarding, and impulsiveness.
I explore these and other psychological obstacles to trading suc-
cess in this book. I also examine a variety of psychological techniques
or principles that may help you to trade independently of your emo-
tional responses to the stress of trading. To convey a sense of the kind
of communication that transpires in my coaching sessions, I have in-
cluded a few dialogues with traders. Traders who have reviewed
them have found them useful in exploring some of their own trades.
My hope is that the examples and recommended solutions I describe
will give you a glimpse into the trading world from my perspective
and enhance your ability to take risk and master market uncertainty.
You will notice that I have deliberately avoided naming specific
companies traded because I have been more interested in illuminat-
ing useful trading strategies than in specifics about particular compa-
nies. Finally, as in my previous books, I have disguised the identities
of traders because my purpose is more to draw out generic principles
that might be applicable to other traders than to talk about their own
unique personal experiences.
It is my hope that, as with my previous two books, you will
profit from your reading and periodic perusal of the concepts in this
book, and that it will provide you with a new and stimulating per-
spective that will enhance your trading success.
ARI KIEV
New York, New York
March 2002
vi
AACCKKNNOOWWLLEEDDGGMMEENNTTSS
As with my previous books on trading, Trading to Win and Trad-
ing in the Zone, many people have helped me to develop the
concepts explored in this book.
First and foremost, I want to thank the various firms with whom
I have consulted over the past several years. They have provided me
with the chance to help traders develop their potential and produce
amazing results despite the difficult markets we have experienced
during this time.
I am most grateful to the various traders who have shared their
perspectives with me and taught me so much about risk taking in all
its dimensions. I also want to thank the traders who read and com-
mented on portions of the manuscript and helped me to clarify some
of the concepts that I have explored in this book.
I especially want to thank Tricia Brown, who has helped me to
organize thousands of pages of transcripts and notes into a workman-
like manuscript, integrating a mass of trading material with the psy-
chological and philosophical premises that I believe undergird the
task of taking risk. I also want to thank Grace Lichtenstein, who was
so helpful in reviewing the book in its final stages.
In addition, I want to thank my editor Pamela van Giessen for
being a committed listener who has helped keep me on track, espe-
cially during the final stages of preparation of this manuscript.
Last, but not least, I want to thank my wife, Phyllis, for her sup-
port and encouragement throughout all stages of this project, from
inception to completion. Her practical coaching helped me to stay on
task during the entire course of this project. A.K.
vii