What is Risk Management?

Risk management is one of the most important topics you will read about in securities trading.

Because it is important? Well, we are in the business of making money, and to make money we have to learn how to manage risks (potential losses).

Ironically, this is one of the most reviewed areas in the world of securities trading. Many Forex brokers are just eager to go straight into trading regardless of the total account size.

They simply determine how much stomach they have to expose themselves to losing in a transaction and press the “trade” button. There is a term for this type of transaction and it is known as …

BETS!

What is Risk Management?

When you make transactions without rules for risk management, in fact what you are doing is gambling.

You are not looking for a long-term return on your investment. Instead, you are just looking to win “the jackpot.”

Risk Management not only protects you, it can make you very profitable in the long run. If you don’t believe us, and you think “gambling” is the way to get rich, consider this example:

People go to Las Vegas all the time to gamble their money in hopes of hitting a “jackpot” and in fact, a lot of people win.

So how come casinos in the world still make money if many individuals win “jackpots”?

The answer is that even though there are people who win, in the long run, casinos are still profitable because they bring in more money than people who do not win. That’s where the expression “the house always wins” comes from.

The truth is that casinos are just rich statistical experts. They know that in the long run, they will be the ones making the money and not the players.

Even if Joe Schmoe wins a $ 100,000 jackpot on a slot machine, the casinos know that there will be hundreds of players who WILL NOT WIN and the money will go straight into their pockets.

This is a classic example of how statisticians make more money than gamblers. Even if you both lose money, the statistician, or in this case the casino, knows how to keep your losses under control. In essence, this is how Risk Management works. If you learn to control your losses, you will have a chance to make yourself profitable

Ultimately, Forex trading is a numbers game, which means that you should use every little factor to your advantage, as much as you can. In casinos, the house edge is sometimes only 5% of that of the player, but that 5% is the difference between being a winner or a loser.

You want to be the wealthy statistician and not the gambler because, in the long run, you want to be “always the winner”

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