Achieving a healthy profit always requires great risk: myth or reality?

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As you may already know, The Forex world is full of myths about trading. Well, there is a known myth saying that if you want to maximize your profit, you have to take big risks. Probably, this tale rose from the comparison of day trading with the bonds and obligations profitability. Let’s analyze the mathematical base of large risks in trading:

 

If you look at the returns data of bonds and obligations profitability, you will see that stocks are more profitable and have higher risks than bonds. In day trading things look different, because  here traders do not work with absolute returns and absolute volatility.

 

For example, a stock costs 10$ and you got a signal to buy. You have 2000$ on your account and want to risk with 1% in this trade, mean 20$. The price rose with 10%, so the stock makes 11$ now. The money that you will earn in this trade depend not only by the volatility of the stock, but also by the way you will trade in the limit of 1%.

 

If you will buy stocks with 30$ and you will place the stop loss at 29.90$, your risk for each share will make 0.10$. If you risk in this trade with 200$, you can buy 2000 stocks. In this case you will need leverage. Te price moves up and you sell your stock for 3$ more expensive, you will earn a profit of 30% from your account balance.

 

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Try to apply this technique in your day trading

 

Many traders avoid to trade with volatile instruments because they think it is risky. Well, this is not true. By placing the stop loss, you limit the assumed risk. So all your trade resumes to the fact to determine which part of your capital you afford to risk, where you will place stop loss and what would be the size of your position.

 

It doesn’t mean that you should seek trading with volatile stocks, but you neither should avoid it. Just wait for the right moment to open the trade with a small risk, so the stop-loss could be closer to the entry point. Be patient and you will be able to take a larger position with a limited risk, regardless of the stock’s volatility. You can also trade with other instruments with a smaller volatility, but remember about the risk management that is an important factor for your position size and your profit.

 

By the end, it is very important how the trader sets the risk parameters and the possible profit. You can opt for small positions with big stop, or you can trade large positions with a short stop. In both cases, your risk is under control. You can nicely trade with any instrument only if you wait for the right moment, when the stop will be short and the profit potential will be higher.

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