This is one of the most important topics you will ever read about the trading business.
You are probably wondering why it is so important. The simple answer is that in this business, money is made by learning to control the risks involved (your potential losses).
Surprisingly enough, this is the area that most new traders skip right over. They want to get to the trading and aren’t interested in things like risk management.
They pick out an amount of money they are willing to lose in one trade, then they hit the button and go. There is a different term for this type of trading, and it is known as. . .
When trading without any risk management, you are actually betting your money. You’re not thinking about the long term, just the short term payout. You may win the “jackpot” a few times but in the long run, you will lose like most gamblers do.
Risk management not only protects your bankroll, but it can make you a very profitable trader over the long term. If you’re not buying what I’m selling, have a look at this example:
There are thousands upon thousands of people who travel to Vegas each and every year to gamble their money, hoping to win big. Some of them do win.
It makes you wonder how casinos are still in business if people are “winning big”…
The answer to that question is that casinos make more in the long term from losers, than they ever pay out to winners. If you have ever heard the term “the house always wins” – that is essentially what it means.
Casinos understand how to use risk management, and they are milking thousands of gamblers every single year. They are extremely wealthy statisticians and they always come out in the lead.
Even if John Smith scores a $350,000 jackpot from one of their slot machines, the casino owners aren’t worried. They know that before the end of the week, all of the thousands of losers will have more than made up for any losses that they paid out for that jackpot.
That is a great example of how statisticians are able to make money, while gamblers cannot. Both parties lose money, but the statisticians are able to manage their losses and be very profitable over the long term. Learning to control losses is the first step to learning to be profitable trading.
Your goal is to be the one making money over the long term. Be the statistician and don’t be another one of the gamblers who goes bust within his first year of trading.
How do you go about becoming a calculated risk taker and not a gambler who throws money away?
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