The Dialectics of Trading:
Strategy, Risk/Reward, & Money Management
Not all trades are as carefully chosen as others. In the art of trading, the financial profit or loss of the trade is, with all due respect, a mere side-note to the exercise of mental strength and subsequent gain of knowledge. Thus, if one is to approach making trades with the desire to learn, it would be wise to care about the process being executed. Before making a trade, for example, you should consider the following variables: the size of your account, how much you are looking to expand it, how long you are willing to wait to do so, and lastly, how much you are willing to lose. Doing this preliminary work, that is, outlining the foundations through which you can later tailor your trading method, is necessary if one is to have a greater understanding of trading as an art.
After you feel that you have successfully prepared the soil from which your trade can grow – a feeling that should grow stronger as time and practice in trading is gained – you are justified in making what you see as a wise trade choice. When in the process of making a choice, you should consider the probability of success on the one hand, and the possibility of profit on the other (in other words, the dialectic of risk with respect to the reward – or visa versa). The safest trades are those with a high probability of success or those that have little consequence for misjudging the market. Of course, the safest trades also come with the smallest reward per trade. One should keep in mind, however, that over time, these small profits are bound to accumulate; thus creating a great reward. Likewise, a trade with less likelihood of success will have a greater reward. When viewed from the perspective of the long-term, the safest trades will more likely profit whereas the more dangerous ones have the potentiality of going bankrupt, and on the other hand, the possibility of hitting the jackpot. The method of balance between risk and reward should be dependent upon the answers you gave in the preliminary work; for, your preliminary work is the soil and the trade is the tree – hopefully together they bear healthy fruit.
A Word to the Wise…
The Basic Motilities of Trading
1) Buying (a.k.a. being long the market): In this case one is betting that the market will go up
2) Selling (a.k.a. being short the market): In this case one is betting the market will go down
3) Cash (a.k.a. standing aside): In this case one does not hold a betting position.
If the market moves in your favor, money will grow on trees; yet, if it goes against your position, their apples will be poisonous.
Howard Tyllas Copyrighted June 6, 2007 |
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