Risk and Success: Brett Steenbarger on Why Traders Must Embrace Calculated Risk

Download PDF on “Risk and Success”

Source: Brett N. Steenbarger

Brett Steenbarger is a clinical psychologist, active trader, and performance coach whose work bridges academic psychology and practical trading. His brief therapy framework applies short-term, solution-focused psychological techniques to the specific performance challenges traders face. The “Risk and Success” paper addresses one of the fundamental paradoxes in trading psychology: the traders who succeed are those who embrace calculated risk, while the traders who fail are often those who either avoid risk entirely or take risk without a defined framework for managing it.

The risk-avoidance failure mode is the less intuitive of the two. Most trading education focuses on the dangers of excessive risk. Steenbarger’s insight is that insufficient risk-taking is equally destructive to trading performance, for a different reason. The trader who sizes positions too small, who waits for the perfect setup that never arrives, who exits positions at the first sign of adverse movement, is not being prudent. They are expressing the same loss aversion that the three vices framework documents, in the form of risk avoidance rather than holding behavior.

Jerry Parker identified the same pattern from the practitioner side: “Many [traders] are too conservative in their willingness to leverage.” The conservatism Parker describes is not the risk management of a systematic trader who sizes positions to a defined percentage of equity. It is the fear-based under-sizing that captures only a fraction of the system’s available positive expected value. Johan Ginyard’s research found the same pattern empirically: participants who understood the positive-expectation game left significant returns on the table through fear-based under-sizing.

The relationship between risk and success that Steenbarger documents is not linear. It is not the case that more risk always produces more success. It is the case that correctly calibrated risk is the prerequisite for the results that the system can produce. Too little risk produces returns far below the system’s potential. Too much risk produces catastrophic drawdowns that interrupt the compounding process. The correct amount of risk is determined by the system’s parameters, not by the trader’s comfort level.

Steenbarger’s brief therapy framework addresses the comfort level component directly. The goal is not to eliminate the trader’s discomfort with taking calculated risk. It is to identify the specific cognitive and emotional patterns that produce under-sizing or avoidance, recognize them when they occur, and have specific behavioral alternatives ready to execute instead. The discomfort is acknowledged and addressed rather than suppressed, which is the characteristic of the brief therapy model that makes it more durable than approaches that try to override emotional states through willpower alone.

The connection to systematic trend following is that the rules encode the correct risk calibration before the position is established. Volatility-normalized position sizing defines the correct position size based on the market’s current behavior and the system’s risk targets. The trader who follows the position sizing rule is not making a risk decision in the moment of entry. They are executing a rule that was designed when the comfort level and the correct risk level were aligned. The position sizing rule is the structural solution to the risk avoidance that fear-based psychology produces.

Download Brett N. Steenbarger’s “Market Psychology Questionnaire.”