What is risk management?

Risk Management is one of the most important topics you will read about trading. Why is it important? In the business of trading, we must learn how to manage risk (potential loss).

Ironically, this is one of the most overlooked areas of trading.

Many traders simply rush into trades without considering their overall account size.

They simply determine how much they can afford to lose on a trade and then press the “trade” button.

There is a term for this type of trading…it’s called…Gambling!

When you trade without risk management rules, you are effectively... speculating.

You are not seeing your long-term returns. Instead, you are just looking for the "jackpot" Risk management rules will not only protect you, but will allow you to win big in the end. If you don't believe us, and you think "gambling" is the way to get rich, then consider this example:

People always go to Las Vegas to gamble in the hope of winning a large sum of money, and in fact, many people do win.

So how can casinos still make a profit if so many people are winning the jackpot?

The answer is that even if people win the jackpot, the casino is still profitable in the long run because they make more money from people who don't win.

This is where the term “the house always wins” comes from.

The truth is, casinos are just very wealthy statisticians. They know that in the long run, they will be the ones making the profit, not the gamblers.

Even if a $100,000 jackpot is won, the casino knows there will be hundreds of other gamblers who don’t win the jackpot and that money will go right back into their pockets.

This is a classic example of how statisticians profit from gamblers. Although both parties lose money, the statistician, or the casino, knows how to control the losses.

Essentially, this is how risk management works. If you learn how to control your losses, you will have a chance to make money. Trading is a numbers game, meaning you have to tilt every little factor in your favor as much as possible.

In casinos, the house edge is sometimes only 5% higher than the player's edge. But that 5% is the difference between a winner and a loser.

The reason you want to be a wealthy statistician and not a gambler is because, in the long run, you want to "be the long-term winner."