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Risk:Reward

The typical trader is not profitable, and I suggest that one must learn to operate differently than the typical trader.  One example is how the typical trader looks at risk versus reward. I’m not talking about probabilities or risk:reward ratios, I’m referring to something entirely different.  One of the things I do in my work with traders is teach them to look at it the following way: The trader determines the risk, but any potential reward is determined by the market. Thinking about risk versus reward in this fashion has a number of benefits.

It helps operationalize what I mean when I talk about focusing on what we can control and letting go of the rest.  It is also a good example of one of my rules in action, that we must be rigid with risk but flexible with expectations. This is part of the bigger picture of focusing on doing the right thing versus focusing on being right. And as I talked about in my recent webinar, a specific technique is for a trader to continually ask the following question at each point during the trading process when a decision or action is about to made: “Am I acting in my own best interest right now”.

Trading well over time requires that we control the risk and must be flexible with expectations by accepting the fact that we must adapt to what the market is doing regardless of our wishes.  It also serves as a reminder that upon entry, a trader is essentially assuming that if they go long/short they believe (and need)  other buyers/sellers are going to step in afterword and move the market even further by paying worse prices.

More on this extremely important idea of accepting risk and managing expectations in future posts.