Managing Risk in Trading

It often amuses me when my non-trading friends tell me that they could never play the markets for a living because the risk is too great. Risk is something that is omnipresent in life, our attitude towards it changes with the way it is managed, and the frequency of exposure.

I’ve used a car analogy before, and it will serve a purpose again here. Anyone who drives is putting themselves at risk. No matter how carefully they may handle their vehicle, there is always some other nutcase out there ready to cause an accident. And yet even knowing that thousands of people are killed on the roads every year, we get behind the wheel without a second thought. I think this is a combination of the “it will never happen to me” syndrome, and the fact that driving a car is such an everyday occurrence we are desensitised to the inherent dangers. Indeed the same can be said for almost any activity – just living life is full of danger and risk, but we are accustomed to it and accept it accordingly.

When it comes to the markets, we as traders actually have more control over the risks we take than in many other activities. Provided we have strict money management rules, good discipline, and a sound backup plan for when the unexpected occurs, we can control our financial risk very tightly indeed. We start each day knowing that the worst case scenario is that could lose $x. We are not taking our lives in our hands, we have nothing to fear from the drunk driver around the next bend, we don’t even need to concern ourselves with the possibility of our employer going out of business overnight.

And so I smile when my non-trading friends tell me they couldn’t handle the risk that my daily job involves, because I know that in the bigger scheme of things, I have far less risk than they do.

Harvey can be contacted via his website, where you can also read about his day trading course

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