Everyone who has done any reading on trading or investing has heard Buffett's Rules One and Two:
Rule Number One - Don't Lose Money;
Rule Number Two - See Rule Number One.
(these rules are most often attributed to Bufffett, but I've no idea whether he coined them or not). While the idea that one should not lose money when investing is a good notion, it is very impractical, impossible even. The very existence of the market implies risk. From the farmer who borrows money from the bank to buy a tractor so he can increase his acreage in production to the speculator who is betting that the dollar is going to fall against the yen (two ends of the investing/trading spectrum), risk is playing its part. The "Don't Lose Money" prohibition is a good guideline, but like all guidelines, it comes with a wide margin of error. You will never make any money if you are not willing to incur at least a small risk. Even putting money in a low yield savings account has risk (opportunity costs, inflation, bank insolvency). And you will never make serious money without being willing to take on the risk that leverage imposes. Suffice it to say that risk is our enemy, but in order to win, we must seek it out, and master it.
The issue becomes then, how best to manage risk? Volumes have been written on the subject of money management, and most of what has been written by successful investors and traders (Buffett, Booker, Ponsi, Elder) is useful. The bottom line is, however, that you've got to find your own comfort level when it comes to risk. You've got to be willing to embrace it, but how much will depend on your risk tolerance. Your analysis of how much risk you can and should accept will be a function of your financial position, your trading goals and your psychological make up. It is a question that only you can answer. Most broker sites (at least stock/options broker sites) will have some tool to help you decide what your risk tolerance is, but don't rely too much on what those results are. The answer is inside you and you know, or should know, what it is. It is important to find out what your acceptable level of risk is, because if you trade outside of it you will lose. Too much risk engenders fear and fearful you makes bad decisions. So find out what your level of risk should be, stay with it and periodically revisit the issue to see if the parameters have changed. Remember, no risk, no reward. Too much risk, busted account.
Good Trading!
Rule Number One - Don't Lose Money;
Rule Number Two - See Rule Number One.
(these rules are most often attributed to Bufffett, but I've no idea whether he coined them or not). While the idea that one should not lose money when investing is a good notion, it is very impractical, impossible even. The very existence of the market implies risk. From the farmer who borrows money from the bank to buy a tractor so he can increase his acreage in production to the speculator who is betting that the dollar is going to fall against the yen (two ends of the investing/trading spectrum), risk is playing its part. The "Don't Lose Money" prohibition is a good guideline, but like all guidelines, it comes with a wide margin of error. You will never make any money if you are not willing to incur at least a small risk. Even putting money in a low yield savings account has risk (opportunity costs, inflation, bank insolvency). And you will never make serious money without being willing to take on the risk that leverage imposes. Suffice it to say that risk is our enemy, but in order to win, we must seek it out, and master it.
The issue becomes then, how best to manage risk? Volumes have been written on the subject of money management, and most of what has been written by successful investors and traders (Buffett, Booker, Ponsi, Elder) is useful. The bottom line is, however, that you've got to find your own comfort level when it comes to risk. You've got to be willing to embrace it, but how much will depend on your risk tolerance. Your analysis of how much risk you can and should accept will be a function of your financial position, your trading goals and your psychological make up. It is a question that only you can answer. Most broker sites (at least stock/options broker sites) will have some tool to help you decide what your risk tolerance is, but don't rely too much on what those results are. The answer is inside you and you know, or should know, what it is. It is important to find out what your acceptable level of risk is, because if you trade outside of it you will lose. Too much risk engenders fear and fearful you makes bad decisions. So find out what your level of risk should be, stay with it and periodically revisit the issue to see if the parameters have changed. Remember, no risk, no reward. Too much risk, busted account.
Good Trading!
