Understanding Risk!

Understanding Risk
The Hallmark of a Successful trader.

It is all too easy in trading to focus on how much you can make as opposed to how much you can lose. If you are a new trader, I recommend that you evaluate how much of your time and energy you are spending on downside protection as opposed to profit potential.

A speculator is some who analyzes their downside, the level of risk, and probability of loss for the return, and then decides whether to take action. A gambler is someone who either doesn’t understand the risk for the return, or just as likely chooses to ignore it .

The media, books, news, the industry, etc. generally focus on how much you can make. That is what sells! All too often we are encountered with typical headlines of “So and so just made one gazillion dollars in 6 days trading X.” Whether it came in the mailbox, on television or in a book that you read. It can be distracting to the committed trader learning the craft, and damaging in shifting their focus from proper trade management to “swinging for the fence “ mentality in going for long shot winning returns. I admit concentrating on the upside is far more enjoyable than watching the downside. However, the stories of rags to riches, uplifting as they may be, can distort reality for a new learning trader.

The long term successful trader is one who is constantly watching their downside not only in proper sizing based upon their account capital, but in sticking to their trade plan and not going for a low probability chance of abnormally huge gains on any particular trade. Here is a list of questions that will assist in keeping a newer or struggling trader from getting sidetracked.

For a particular trade, What is the Risk to Return?
How Probable is the Return for the level of Risk?
Do I have a proper stop loss in place when I enter a trade?
Does my written trade plan have method of managing those stop losses on trades that are going my way?
Am I willing to Accept this level of Risk for the Return?


It is only through addressing professional questions like these, that a trader will be able to not only survive in the long run, but actually thrive!