Forex Trading Strategies: Good Risk Versus Bad

Good Risk Versus Bad

Let’s face it we all pay lip service to the idea of risk as a necessary factor for progress but deep down we try to avoid it as much as possible. In fact the whole history of our civilization is nothing more than a massive attempt at removing as much risk from our lives as possible. From sustainable agriculture to make sure that we never starve, to the use petro chemical energy to make sure that we never freeze or die of heat exhaustion, to antibiotics to help us ward off terminal infections modernity is all about making our life safer, longer and more secure in every possible way.

In our perfect world every lottery ticket would be a Powerball winner, every business decision would produce massive profits with minimum capital outlay and every trade would become a winner producing a clean 45 degree slope in our equity curve. Alas we do not live in a perfect world and much as we try to avoid it, risk is an inherent part of existence. From jaywalking the New York Streets, to driving 80 miles on a crowded highway, we assume a thousand different risks every day and although life is certainly far safer for us than for our hunter gatherer ancestors is by no means completely secure.

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To succeed through life we make a million little calculations every day that assess the risks that surround us. Jaywalking in front of a barreling NY City cab racing to beat the yellow light? Not such a good idea. Crossing Broadway against the light at 6 AM on Saturday morning? That’s very low risk proposition. From the mundane to deadly serious we constantly try to separate good risks from bad in order to make the best possible decisions.

Yet when it comes to trading we are never as discriminating in our choices as we are in real life. I have seen thousands traders (myself first and foremost) haggle over paying an extra $5 dollars for some trinket on the street, yet casually throw away thousands on stupid, badly thought out trade ideas.

The key reason so many people have such fatalistic attitude towards trading is because it is an inherently unstable business. Even if you do everything correctly you often lose. As human beings we are simply not equipped to deal with repetitive failure and quickly give up any attempt at market analysis and simply resort to wild gambling. Yet although markets are more volatile and less predictable than every day business life, they still adhere to the rules of risk. Everyday markets offer us good risk opportunities and bad ones.

This week this idea hit me particularly hard when I looked at the trade record of the BK service versus my own prop account. Although we have certainly made our share of mistakes over the years with BK, the team framework under which K and I operate forced us to consider the good risk versus bad risk question on every single trade. We haven’t always done the proper assessment or even listened to our own analysis, but as a general rule we’ve followed our model, stayed disciplined and as result generated positive returns every single quarter for the past two and a half years.

Contrast that with my own account, where I have repeatedly broken my own entry rules, rushed trades, lifted stops, averaged into losers traded too large for my size and generally treated the whole process as a slot machine in Vegas rather than a serious investment activity. Unsurprisingly, the results of my own trading are almost the perfect inverse of our BK account.

So, as our country celebrates its birthday this week-end I am making a new birthday resolution. Instead of working on any new trade ideas for the rest of the summer I will focus only one setup and ask myself one critical question every time before I put on a trade - is this a good risk or a bad one?

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