INVESTING
Managing Risk is Not the Same as Avoiding Risk
As a trader or investor you have to accept risk, seek it out, but also manage it wisely.
How to reframe taking a risk as good, not bad in trading and investing
I have always been taught to avoid all risks. Don’t invest money because you can lose it. Don’t change your job because you don’t know what the next one will be like. Don’t travel to unknown countries. The world is a dangerous place. Avoid rejection, failure, and losses.
I’ve been banging on about managing risk in my newsletter since I started it
There’s a good reason for that. Most people attracted to trading and cryptocurrencies are gamblers by heart. They thrive on taking risks, competing, and gambling their money — not all, but most.
I’ve seen countless traders make fortunes and then lose everything again with one mistake
I was, in a way, one such trader. My inability to take a small loss led to a large loss, which wiped out months of my profits and then started chewing on my initial portfolio. It’s not fun. It’s not productive. It set me back years! You want to keep what you make, don’t you?
I will say it again — learning to manage risk is the most important part of becoming a successful trader and investor!
Manage risk — yes. Avoid risk — no!
As a trader, your job is to seek out risk actively. You’re always looking for opportunities to make money by taking some risk. You expose your money to the market and hope that on a large enough sample size, you’ll make more than you lose. Ideally, you’re looking to skew the risk-reward in your favor, either by achieving a high win rate or (better) high risk-reward ratio on your trades and investments.
We all lose in the markets — no one wins all the time
It’s not a thing. Don’t believe the X (Twitter) larpers, who are trying to sell you on their paid newsletter or paid group or sell you signals. There is no such thing as never losing in trading and investing. The best traders lose about half the time. They just make more when they win than they lose when they lose.
It’s not that complicated. You have to accept risk, and risk, in our case, is losing money. There is no way around it unless you’re a scumbag who vehemently risks other people’s money. Then you’re just risking your soul and getting shot by someone you scammed!
But losing isn’t fun.
No, it’s not. We all hate losing, especially money. When I lose a large amount of money, it physically hurts me. I’m not a rich guy, and money’s always been tight. The mental hoops I must jump to force myself to risk my limited resources while dependent on them for survival are monumental!
- If you’re wealthy and you play with some “play money” in the markets, you won’t feel this.
- If you’re struggling financially, it’s going to be the most stressful thing imaginable.
You have to accept that risk and take small losses when you’re wrong on your trading or investing ideas.
Do you know what isn’t fun, either? Losing a lot of money!
I lost an apartment because I couldn’t take the loss of an iPhone. I refused to accept that I could be wrong. At the time, I had a very high win rate and felt invincible. Fun fact — I’m not. Any guess what — you’re not, either!
Ignoring risk and pretending it doesn’t exist is not eliminating risk. It’s just being an idiot who will pay the price for deliberate ignorance sooner or later.
After experiencing the pain of significant losses, you’ll struggle to expose yourself to risk again
But you don’t have a choice. If you want to trade and invest, you’re going to have to accept risk. Risk is everywhere, and our job is basically 90% to manage those risks. We avoid the unnecessary ones and minimize the damage of those we can’t avoid.
The truth is that we can’t avoid risk, and we can’t avoid taking on some losses. What we can do is contain them and be smart about it. We have to face our fear and overcome it.
I’ve written about managing risk extensively, so do yourself a favor and make sure you:
- Understand all the risks preying upon your money.
- Control what you can.
- Accept losses when they’re small.
- Understand that trading and investing is a numbers game. Losses are a part of the game.
- Reframe taking small losses and taking risks as good, not bad.
Seek out risk, but be smart about it
- Look for opportunities with a skewed risk-reward ratio and odds in your favor.
- Always ensure your survival and risk only what you are willing to lose. If you want to keep playing the game and eventually win, you have to survive and not lose all your money.
- Build a strategy with an EDGE in the market, and don’t just gamble with your money.
Open the charts and sniff out the good kind of risk, and I’ll do the same. No risk, no gain.
Good luck to us all.
If you’re interested in learning more about risk management in trading, start here:
- Introduction to Risk in Trading and Investing in Cryptocurrency Markets
- Trading Cryptocurrencies is Dangerous — How To Protect Yourself and Your Money
- What Are the Greatest Risks in Trading Coming From the Market Itself?
- How Well Do You Know Your Trading Tools? — Manage Risk of Cryptocurrency Exchanges
- The Biggest Trading Mistakes: Why You Are the Greatest Danger to Yourself
- Is the Market Acting Strange? — When in Doubt, Get the Hell Out!
- Manage Risk on Every Trade — No Exceptions!
- Where to Place Your Stop-Loss Order?
- Alternative Risk Management Strategies to Using Hard Stops on Charts
- Don’t Like Using a Stop Loss? Here’s a Quick Guide to Hedging
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