|
|
|
|
|
|
|
The critical distinction is that there is no limit to the upside. Profitability could increase 50 percent or even 500 percent. However, there is a limit to the amount of money the equity could drop. A drop of 100 percent results in all trading stopping. |
|
|
|
|
|
|
|
|
Risk can be defined as the probability that a trade or a series of trades will result in a loss of equity. Many novice traders define risk very simply as the amount of money they could lose on a particular trade (i.e., where their protective stop is). Occasionally the more astute novice trader will define risk as the entire amount in their trading account. |
|
|
|
|
|
|
|
|
Profit is the trader's reward for doing the right ''things" at the right time. |
|
|
|
|
|
|
|
|
"Great Traders Are Evaluated." |
|
|
|
|
|
|
|
|
Traders who either trade other people's money as commodity trading advisers (CTAs) or are employed by corporations or funds are evaluated on the basis of how much profit was made versus how much was lost. The amount of knowledge they possess concerning technical or fundamental analysis is irrelevant in the final judgment. Technical analysis could give an indication of the amount of risk and the possible gain in a potential movefor example, in a double bottom or a head and shoulders formation. Fundamental analysis can also provide an indication of the risk and reward potential. All great traders know that in order to be successful they must truly understand the concept of risk and reward. Professional traders are constantly striving to reduce risk, while trading with discipline. |
|
|
|
|
|
|
|
|
As shown in Figure 18-2, the amount of risk a trader's equity is subjected to usually increases with the length of time the trade is held, however at a decreasing rate. The amount of risk in placing a trade should always be less for trading in shorter time frames. For example, a trader who is trading off a 5-minute chart should be risking less money per trade than a trader who is trading off a daily chart. Risk and time generally act in lockstep unison. Risk decreases with less time, and increases as time increases. |
|
|
|
|
|