Chapter 14: Risk Management
The risk management aspect of trading is perhaps the most critical part of trading.
Why? We trade in order to profit and to do this we need to know how to manage our risk, in other words, our potential losses. Yet, despite its importance, many traders don’t take the trouble to learn about but instead choose to jump straight into trading. In the end, their capacity for losses can be just determined by the loss of a single bad trade. In one word, this is not trading but “GAMBLING”!
Taking a “free for all” approach towards trading without any sort of rules is in fact gambling. Rather than looking for long term returns, you are just hoping to strike the “jackpot”. Although some people do win jackpots, think of how many that had lost before you win that jackpot. If the odds are not in the casinos’ favour, how long do you think they can remain in business? As the saying goes, “The House Always Wins”. In our case, it’s “The Markets Always Wins”.
The odds that are in the casino’s favour is just 5% and yet it is this 5% that is the difference between a winner and a loser. Speculating in the financial markets is also a numbers game. Thus, you will need every conceivable little edge to get you just one step ahead of the market and this involves you mastering every aspects of trading. Ask yourself do you want to be a gambler and end up being a loser or are you in it to win?