psychology of risk

In the course of my 20+ years in the trading world, the question of when or how to use ‘sim’ has come up dozens of times. When I traded full-time, I used to wonder. When I added coaching, I got the question all of the time.

This week a client told me of an educator who is telling people that once they know how to use a system they should NEVER use sim. The latter is obviously ridiculous as clearly the option to trade in sim is a tool that can have many benefits.

The first most obvious one is this – if one cannot be profitable in sim, the odds of being profitable with real money are low. But even with this, it’s a subjective question in that some people can’t get serious in sim and need real money to even pay attention. So it’s clear to me that the question is, like so much in trading, a personal one.

Here, on the other hand, is what a different client (who is also a pilot and a PhD in Behavioral Finance) wrote about the question.

Why I Love Trading in Simulation by NA

Have you ever flown out of Aspen on a dark snowy evening wondering why you cannot see the lights on the mountain and then all of the sudden hearing a strange noise coming from the engine? Your mouth becomes dry. Your pulse races. Your palms sweat. Fire shoots out before you. You are 700 feet off the ground and panic is not an option. You have to get back on the ground, but you have just entered the “impossible turn” scenario. What do you do? Aviate, navigate, and communicate. Cut the fuel to the engine. Set the plane up for best glide. Make a standard rate turn back to the field. Call in May Day to the tower.

Then you hit the mountain. Why? Because you forgot to reset your altimeter before takeoff and you were only at 600 feet—not 700 feet—when you set up for the turn back to the field. Fortunately, you are in a simulator in Wichita and not in a real airplane. If you were in this situation for real, the NTSB would be calling your loved ones.

Trading simulators, just like airplane simulators, are designed to keep you safe while you practice difficult tasks. Whether it is a million dollar account or a million dollar airplane, you don’t want to crash it. Even if you manage to survive, no one will let you near either again.

I love the sim to test new strategies or just to hotdog around when I am feeling like it on a day when I am already up and I don’t want to give my profits back. I actually love to test heuristics in various time frames in the sim. I actually used it for my dissertation.

But it is more than that to me. The sim helps me manage my emotional state. If I got a letter from the National Mafia (aka the IRS) beating on me for a larger cut, or I had a fight with my spouse or the kids maxed out my credit card, or my partner made up lies about me, I need to get in the sim. It is like going to the gym and punching the bag. I can just punch all the sim trades I want and act as crazy as I want. It is a home for my alter ego. That bad ass kid that did not get loved as a child can find total forgiveness in the sim. It is a 100 percent total nurturing experience for me. It is like having a parent hold me gently while I kick and scream until I am worn out and at last calm again.

And in that moment of calm, I begin to see the information before me with a sharper eye. I am no longer taking trades for the sake of trading but waiting for the proper entry, calculating my risk and assessing the probabilities. Sim trading allows me to return to live trading as the pilot in command—sure that I can make the emergency “impossible turn.”

When I am upset and angry, I often go short regardless of the trend because I am mad. The live account is no place for that behavior. I would like to say I am so much like Mr. Spock that I never let my emotions color my judgment, but I have to confess I am a Captain Kirk all the way. I am as hot headed as the next trader, so I use the sim as a tool for working through my emotions—which are not going away magically just because I command them to. My emotions are survival tools often signaling danger just like the fast heart beat and the dry mouth are signs of danger. Ignoring them would put me in greater danger. And let’s face it trading is dangerous.

I like to think of trading in sim as sharpening my knife before I begin cooking. I can chop onions a lot faster with a sharp knife. I can make profits a lot faster if my senses are sharp and not dulled by confusion. The next time you are mired in emotional overload, try the sim.

SO… WHAT DO YOU THINK?