The Biggest Trading Myth on the Internet… (and what you need to know to avoid being caught in it)

As a trading educator, there is nothing more frustrating than seeing other educators post information in the name of ‘Helping Traders’ that is PURE MYTH.

 

One of the most common topics where Myths are spread is when online educators discus Risk. 

risk_image

Risk is  very misunderstood and online trading educators typically just add to the chaos.

You hear them say things like “This method will simultaneously minimize risk and maximize reward” which is fundamentally incorrect and mathematically impossible. I’ve written an entire article on that phrase along because it bothers me so much.

 

Here is the common confusion about Risk:

Risk is not the ultimate trading enemy or the monster in the closet that we need to hide from.

I mean, seriously, every training I hear about Risk is how to AVOID risk or how to LIMIT risk or how to ELIMINATE risk; and while I am fine with the idea of having less money on the line at a given time in a given situation…

[tweetable alt=””]You should be learning how to USE RISK, not how to avoid it.[/tweetable]

 

See, for a trader, risk is actually your best friend. Risk is what gives you the ability to make money; without it, it would be impossible to invest and impossible to earn any amount of income from your investments.

The entire purpose of a Market is to leverage the risk of loss for the potential of gain, so if you are afraid of risk or looking to avoid it, you are in the WRONG place.

Here’s how to avoid Risk in the Market: Email your Broker and close your account right away.

Now, let me be clear before you attack me in the comments 😛 (by the way, comments are more than welcome), I am more than in favor of having risk guidelines, strong risk management rules, risk parameters, etc.

You should absolutely want to to keep your risk under control, that is a good thing which I am in favor of, but you need to have a fundamental understanding that risk is a GOOD THING.

Take a look back at World History and let me know of one great thing that has happened in the past few thousand years without someone taking a risk. I certainly can’t think of anything.

I can tell you that I live in a wonderful country here  in the US with tons of freedom and wealth and opportunity because a group of people were willing to take a huge risk.

My point?

[tweetable alt=””]Risk is a powerful thing. Risk is a beautiful thing.[/tweetable]

 

Like most powerful things it CAN be dangerous, but your job is to use it wisely and effectively instead of letting it destroy you.

 

Okay, now that I have finished my Risk Sermon, are you ready to talk about trading? 🙂

 

Believe it or not, this is the simple part of the article…

If you can buy into the truth that risk is a tool and an opportunity, rather than a monster in your closet, the remaining question is “How do I use it effectively?”

At Winner’s Edge, the answer to that question is very simple in our minds.

Trade with a high Reward to Risk strategy and use the power of the Trend to accomplish that task.

When it comes to trading any market, we believe that the most powerful way to USE risk is to take advantage of strong trends using intra-day entries with long term potential.

Here’s an example of a trade I am in as I write this article:

EURAUD Live Trade Example

All I did was use the SMI Tool (literally only cost a few bucks on our website if you want to use it) to confirm what kind of trend we are in and then use our Trend Line Break strategy to get a good entry.

The power of this trade is not that I am up 130 pips..

Don’t get me wrong, I like being up 130 pips, but what makes this powerful is that I used 109 pips of Risk to set up a trade that could run 200, 500, 1,000 or 2,000 pips because it is in line with a powerful trend.

Take a look at the space I have available on the Daily Chart:

EURAUD Example 2

Again, all I did was USE my Risk wisely. In trading, you MUST risk in order to make money, so why not use your risk for a much better potential?

That’s what we do in the Double Trend Trap Method.

The Method does not consistently hit 1,000 pip winners with tight stop losses by any stretch, but what it does do is put you in position to grow your account using the power of the trend and leveraging your Risk.

Recently, I moved my stop up to +12 pips because I DO believe in taking potential loss off the table, but remember that I had to use the initial risk in order to be in the comfortable position that I am in now.

One thing to remember is that using risk wisely often leads to a lower risk, comfortable situation like the one I am now. It takes that initial risk to give you the potential to be in a no-risk situation… I guess that is what we’d call a trading paradox.

So, to sum up my Rant on Risk, just take note of these few Bullet Points:

 

1. Risk is not the Enemy, it’s an ally if you use it correctly.

2. The easiest way to use Risk effectively is high Risk/Reward ratios

3. The easiest way to use high Risk/Reward ratios is the power of the trend.

4. The easiest way to use the power of the trend is with our Double Trend Trap Method (free).

5. The easiest way to use the DTT Method is with our Custom Tools (not free).
Thanks for your attention and enjoy your weekend!

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Winners Edge Trading was founded in 2009 and is working to create the most current and useful Forex information and training available on the internet.

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  • Excellent!

  • ChuckS123

    I’d say risk is a necessary evil.

  • tptoua

    risk and reward are two sides of the same coin.You have to take risk to expect reward. no risk no reward

  • cazzie

    Hi there Nathan.
    Good write up on risk Vs reward. It got me thinking about some of the trades I’ve closed out far too early, when I should have used more common sense. A lesson learned is a lesson gained.
    I too have been in the EURAUD for quite some time, but unlike you, I have been taking profits once the trade has hit the D extension on the 60 minute time frame. Come Monday I will re-enter on a counter trend line break and use the Daily D ext as my target 1 and the monthly D as my target 2. Then will have to reassess long term situation before I take on further trades.

  • IsItCoffeeYet

    Great insight into Risk. Thanks Nathan!