Risk More, Earn More

“Have you increased your trade size?” – A friend asked me point blank. We have not met for several months, and he stuffed this in my face. What happened to “you look great?” What a ___? (I know you are reading this.)

I fumbled “yeah, of course I have, well … ” and whatever soundbites I could piece together as an intelligible answer.

Well … in a way I think I have. You see my friend successful as he is, founded his game on the traditional premise – more risk, more reward. His question hoped to gauge my maturity in the game.

Simply, if you get a 100% return on what you risk per trade,

 

Risk         Potential Reward

$1000       $1000

Risk         Potential Reward

$2000       $2000

 

Risk more, you lose more or win more.

My friends know I do not risk more than 1% of equity on any trade. I confess on occasions, I have lost self control. I let greed overwhelm me, I doubled everything – and risked 2%.

Sigh, so even if I increase my trade size by one zero, two zeroes – it is still a timid trade compared to the millions he risks. But I was answering truthfully nonetheless – 1% of a larger equity base is a larger trade size …. well, … except these days, I oft risk only 0.5% instead ……

 

Previous per trade

Risk         Potential Reward

1%         1%

 

Now per trade

Risk         Potential Reward

0.5%       0.7% to 1%

(higher spreads these days)

 

My friend focuses more on profit potential a.k.a. greed, whilst I focus more on risk mitigation a.k.a. paranoia. That is why he is a longer term trader whilst I am a very short term trader. The forex market, quite unlike its equities peer, is not a viable long term asset class in terms of fundamentals and its dynamics highly disadvantage the retail trader.  Yes, sometimes currency pairs trend for a long duration, but not due to fundamental valuations. Managing risk is about the only trump card a retail forex trader has. Hence, in the forex market at least, I am happy to be risk averse. Throw this in with hard work, and we get a highly respectable annual return with much lowered risks than long term trading.

Why not increase risk back to 1% and double the return? Seriously?! Finance 101 !

Risk more, you lose more or win more. That’s the universal truth —- in gambling.