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When trading and investing, one can not know in advance which trades will be successful. We can never know how much profit (if any) will be made in any given trade. What we can do is manage (not eliminate) the risk of each and every trade via risk and money management rules. Thus, trading and investing is all about the control of risk.
Here is a poem written about risk by Dr David Viscount:
- To laugh is to risk appearing the fool.
To weep is to risk appearing sentimental.
To expose feelings is to risk exposing your true self.
To place your ideas, your dreams, before a crowd is to risk their loss.
To live is to risk dying. To hope is to risk despair. To try is to risk failure.
But risks must be taken, because the greatest hazard in life is to risk nothing.
The person, who risks nothing, does nothing, has nothing and is nothing.
They may avoid suffering and sorrow, but they cannot learn, feel, change, grow, love…live.
Only a person who risks is free.
– Dr David Viscount
The risk associated with trading is the loss of capital; the reward is the growth in our capital from the deployment of a successful trading and investing strategy that manages risk according to pre-defined rules and within ‘acceptable’ limits. To make a profit from trading the financial markets we must be prepared to take risk – no risk = no reward. Those who approach the markets with a fear of losing or of accepting risk, will never reap the potential financial rewards offered by the markets. In doing this we must also accept that not all our trades will be profitable, and that losing trades are an inevitable part of our overall long term success.
The key is to control our risk. We do this by having pre-defined money management and risk management rules that are an integral part of our overall trading and investing strategy. These rules allow us to define the risk we are prepared to take on each individual trade, as well as on our total portfolio. By knowing exactly what these risk parameters are, we are then able to consistently engage the market in a disciplined way.