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.