Why Traders Should Think About Risk, Not Reward First

Winsor Hoang  |

There are few things that can make a grown person as worked up and emotional as trading. Gaining money gives the trader a rush, a boost of confidence, and a feeling of achievement.

Loss on the other hand can make the trader experience self-doubt, anxiety, and in some cases depression. Traders who are consistently profitable are able to control their emotions. Being able to effectively manage emotions is a skill that needs to be developed. But how?

Think risk first.

When a trader thinks risk first they are risk managing. Risk managing is part of money managing and any successful trader will tell you just how important money management is. A trader cannot be consistently profitable without good money managing skills. Most ‘gurus’ will simply tell you to look at your risk-to-reward ratio when money managing. But what’s interesting is that majority of traders will consider their rewards more than the risk they have to take.

What they don’t grasp is that trading is not just about winning. Losing is a huge part of trading. In fact it’s inevitable, and a trader can go through a string of losses that can wipe out his account. Loss has to be prevented if a trader is to be profitable. In order to do this, traders risk manage.

Minimizing losses is key.

A trader who risk manages, thinks more about how to prevent loss instead of becoming obsessed with the potential reward. This trick is more effective because rewards don’t need to be managed. They take care of themselves. Risks however do have to be managed, so as to prevent losing to the point of a dry account.

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Another bonus to risk managing is that it also helps with emotional management. Money management and emotional managing are not separate skills in Forex trading. They work together. A trader that has developed good money managing skills by thinking risk first is emotionally prepared for lose. They know where to set their stop loses as well as prepare for unexpected economic events and financial uncertainties. The more prepared you are for a bad trading day, the less nervous and anxious you’ll be while trading.

And don’t get over-exuberant.

Thinking risk first also helps a trader to emotionally manage for when they have gains. A trader who trades because of the rush they feel when they win is at risk of becoming a gambler. This type of trader can easily wipe out their account from overtrading as they try to keep up that high feeling. But traders who money-manage can learn how to deal with their emotions when they are in winning mode. They do this by paying careful attention to how they feel when they win, and then take steps to control their emotions, so they can prevent themselves from getting over excited.

They also use their money management skills to develop strategic trades that have an edge. Strategic traders are less likely to be emotional because they are not relying on luck. This gives them more control over their losses and gains, which helps curb the highs and lows that emotional traders experience. Strategic traders carefully consider the potential risk for each reward.

Money management and emotional management should be used together to make you a profitable trader. To help develop your money management skills focus more on the risk involved in each trade and how to prevent loss.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.


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