“Risk” is one of my favorite topics, because, while there is an obvious downside, there is also a less obvious upside.
The very definition of risk implies danger or exposure to harm or loss.
Understandably, we have an innate aversion to things like “harm” and “loss,” but, risk has its rightful place. It’s essential and it comes pre-loaded with opportunity. Risk forces you to increase your skills and make new discoveries.
“Risk” is another way of saying we have hope for improvement and the guarantee of increased understanding (good or bad.)
There is a positive side to greater risk.
Here is a a bold statement:
Taking 1 trade with 10 lots is less risky
than taking 10 trades with 1 lot.
Why?
The reason is because it’s easier to win 1 trade in a row than to win 10 trades in a row.
Not only is it easier to win 1 carefully placed large trade, but it’s also harder not to become reckless with 10 small trades! (Am I right?)
Reckless trading ends in disaster every time.
Risk:Reward ratios are a myth.
Good risk ratios were designed to make you feel better about losing money. “Sure, I lost 1, but I could have won 3! …” Next time you hear that, just say… No.
Risk is an existing element of the trade setup. It is what it is. If the market can move 100 pips against you and still be in the correct position for your trade, then setting a 30 pip stop-loss, in the name of having a good risk ratio, is like agreeing to lose the trade even though there’s still a good chance it will go your way.
The problem is people don’t feel good about placing that large stop-loss when there’s only 30 pips to gain. I would rather feel terrible about losing, regardless of what I could have gained.
You can reduce actual risk by setting up trades based on pattern recognition so you have an expectation about the outcome, regardless of the risk ratio. A smaller stop-loss may appeal to your natural desire to protect the money in your trading account, but a wider stop-loss provides a greater probability of success, merely from a mathematical standpoint.
Risk forces you to be your best more often, and offers you a chance to expand your potential.
“Risk comes from not knowing what you’re doing.”
-Warren Buffett
I’m here to make Forex trading simple so you make it successful.