We know… We know…. We know… WE KNOW!
We are supposed to minimize our risk and maximize our profits… We have heard it so many times that we are having dreams about it every trading night of the week.
But, has anyone ever told us HOW to do it?
Sure, we have heard “Cut your losses short and let your winners run” –If anyone has had success with that, let me know.
How about the idea of minimizing risk, while maximizing profit? If anyone has figured out that one, I would love to hear about it.
The idea of minimizing risk while maximizing profit is a logical flaw–it doesn’t make sense. Risk and Reward have a direct relationship–not an inverse relationship. If you trade with a 10 pip stop loss and a 20 pip target, and you minimize your risk by reducing your trade size, you are also minimizing your reward.
If you tighten up your stop loss to lessen your risk, but keep your target the same, you are STILL minimizing your reward–this is the one that most people do not understand. Tightening your stop loss so that you can have less risk with the same reward is not sound logic. If you tighten your stop loss, you are directly reducing the amount of times that the trade will hit your target (I don’t care how good your entry is), therefore you are reducing your reward. Again, you cannot minimize your risk without also minimizing your reward–the relationship simply does not work that way.
So, I am begging you: please get the idea out of your mind that you can simultaneously reduce risk and increase reward.
If you do not want to put forth risk, please close down your Forex Account(s) immediately.
I apologize for being harsh, but I believe that one of the most critical steps to being successful in trading is being realistic. If you do not have a realistic approach, it seems unlikely that you could succeed. I know that many, many Forex traders begin this process with completely unrealistic ideas of what can be expected from savvy investing in this market. I just recently wrote a different article about realistic expectations in Forex. In my other article, I wrote about viewing Forex As A Career, and not expecting to be able to make millions of dollars right away.
My goal is not to turn people away from Forex (I don’t think Casey would be happy with me if I did that 😉 ). However, at the same time, I want people to be very realistic about what the Forex market is and what can be expected from it.
I do not have time in this article to get into everything that it is and what should be expected from it, but for now, I will tell you to expect a challenge.
Anyway, let me get back to the core of this article: Maximizing Profits and Minimizing Risk is, in my opinion, impossible. Now, I definitely believe in doing both of those things; however, they cannot co-exist, and that’s what I am getting at.
Trading is about knowing how to control your risk, and when to keep it very small; trading is about how to take advantage of an opportunity to maximize your profits. Both of these things should be done, but they cannot happen at the same time. In those times when you realize you need to tighten your risk up, you will be getting less profit from your winning trades–and that’s okay; and in the times when you want to maximize your profit, you will need to take on some more risk–and that is okay too.
My point is that trading is about developing a system that works for you. One that enables you to keep control of your risk, but also to take advantage of profit potential. There is a big difference between that and “Minimization Losses and Maximizing Profit.”
Next week, I am going to get into what the actual difference is, and what goes into creating a system that enables you to control risk and increase profit potential without defying logic and common sense 🙂
Stay tuned for that article next week!
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