Watching Out for Risk

Many of my blog posts are inspired by forum discussions I have with other traders because thoughts had by others are often thoughts I once had too. Today’s example is about risk.

Over a year ago I was compelled to respond to “Pete,” a guy who had some definitive, optimistic words for trading strategies he claimed to be using. He posted a number of times before I responded with the following:

> If there’s potential reward then there is no such thing
> as zero risk.
>
> Your posts have full of phrases like:
>
> –“consistent weekly profits”
> –“‘gravy’ forever into the next generation”
> –“the coast is clear to keep it and make premiums
>    until it runs up again”
> –“those who stayed are rich and retiring”
> –“sounds to me like profit all day long and all
>    the way to the bank”
> –“this is a triple grand slam with insurance.”
>
> Where’s the one about trading being like an ATM
> machine that continuously spits out cash?
>
> Nothing about trading or investing is free, nothing
> is guaranteed, and nothing here is ever worth the
> kind of exuberance you seem to project with your
> posts. There’s risk inherent with everything and
> if you trade too large aiming to be too greedy then
> you will one day learn the hard way by getting
> blown out of the game for good.

Pete responded by asking me what I felt could possibly be wrong with some of the trades he was putting on. I replied:

> I’m not going to specifically analyze the pros/cons
> of your trade because we have other wonderful
> traders here who routinely share such insights
> Hopefully they can help with some of your analysis.
>
> Based on my real-world trading experience, though,
> focus on what I said in my last post. It’s at
> least urban legend (if not definitive truth: nobody
> knows) that over 80% of all traders lose money.
> Personally, I think the #1 culprit is unrealistic
> expectations. If you enter the markets thinking
> you’re going to make too much per month then
> you’re going to get beheaded. Your phrases that I
> quoted all suggest just that.
>
> Hence my caution: learn how to determine the real
> risk, watch your back, and be careful. If you don’t
> see the risk then walk (or run) far away.

I think this is good advice for everybody and that includes, first and foremost, myself. I try to remember this stuff each and every day.