The Meaning of Risk

Market play revolves around one central factor.

It’s called risk.

Whether we want to deal with risk or not is up to us.

If we do not want to deal with risk, we should not participate in any market. Period. Let inflation eat our money away in the bank.

Don’t like that option?

Then deal with risk.

In my opinion, there are two ways of understanding risk.

One way is practical, and simple to understand and implement. I like this particular way.

The other way is complicated and mathematical. This method utilizes software to perform mathematical operations using calculus, and expresses risk in terms of greek alphabets. The software spits out an abstract expression of risk, which is then implemented in the trading strategy. I don’t like this method. It’s just a personal choice.

So let me just talk about the practical method of understanding risk.

For me, risk is the money that one can potentially lose in a trade at any given point of time, expressed in percentage terms of one’s total portfolio value.  Period.

Once the underlying risk has been clearly defined and understood, the management of this risk is implemented through a stop-loss which is outlined after considering total portfolio-size and after eye-balling relevant chart-patterns at hand.

This strategy makes risk something tangible, something one can deal with, in Rupee or Dollar terms. It makes market-play a matter of addition and subtraction. It’s practical, simple to understand and easy to implement.

Then, this understanding of risk needs to be coupled with a market-edge to constitute a complete market strategy.

Same story. An edge can be simple. Or complicated. Choice is yours.

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2 thoughts on “The Meaning of Risk

  1. Unnati Worah says:

    Thank YOU Friend ….This is what i have been thinking all the time today.
    It was a wonderful notation.
    Though
    I’ll re read this article many a times for my own understanding..
    and might revert back with questions. Hope U don’t mind. After all U are My BOSS !

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