One of the most important topics you will ever read about trading is risk management.
What is the significance of this? We’re in the business of making money, after all, and in order to generate money, we need to learn how to manage risk (potential losses).
Surprisingly, this is one of the most undervalued aspects of trading.
Many forex traders are eager to get started trading right away, regardless of their total account size.
They simply calculate how much money they can lose in a single trade and press the “trade” button.
This style of investing has a name…called… it’s
Trading without risk management guidelines is essentially gambling.
You aren’t considering your investment’s long-term return. Instead, you’re solely interested in finding the “jackpot.”
Risk management guidelines will not only keep you safe, but they can also help you make a lot of money in the long term. Consider this example if you don’t trust us and believe that “gambling” is the way to get rich:
Many individuals travel to Las Vegas to risk their money in the hopes of winning a large jackpot, and many of them do.
So, how do casinos continue to make money when so many people are winning jackpots?
The argument is that, even if people win jackpots, casinos are still successful in the long term because they get more money from the ones who don’t win.
The phrase “the house always wins” derives from this.
The truth is that casinos are nothing more than extremely wealthy statisticians. They understand that they, not the gamblers, will be the ones to profit in the long term.
Even if Joe Schmoe wins a $100,000 jackpot on a slot machine, the casinos know there will be hundreds of other gamblers who will NOT win the jackpot, and the money will be returned to them.
This is a typical example of statisticians profiting off the actions of gamblers. Despite the fact that both lose money, the statistician, or in this example, the casino, knows how to manage its losses.
This is essentially how risk management works. You have a possibility of becoming lucrative if you learn to control your losses.
In the end, forex trading is a numbers game, which means you must try to sway every single aspect in your favor.
The house edge in casinos is sometimes only 5% higher than the player’s. However, that 5% makes the difference between being a winner and a loser.
You want to be the wealthy statistician, not the gambler, since you want to “always be the winner” in the long run.
So, instead of being a loser, how do you become this wealthy statistician? Continue reading!