Every profession be it a carpenter, a teacher, a servant of
govt., has a fixed reward. The fixed reward may be in the form of salary,
commission, incentive, and bonus. But, the job profile of a trader is
different. There is no such thing a fixed reward. It’s all about knowing the
fixed risk involved. This fixed risk could be the risk to blow a trading
account in a single trade (or) a distributed right risk which will keep you in the profession for a longer time.
So the first and essential qualification a trader needs to have is to find the
right risk to take.
What is the right
risk?
This is a very simple yet, difficult to understand topic for
most because when you lose money even the”right” becomes psychologically “wrong”.
So let’s understand the concept of right risk.
In layman words, it’s the total loss per trade including
your hidden charges (CLICK
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PREMIUM CONTENT FOR FREE) that will keep you in the profession of trading
even after a string of losses. This string can be any number. So one has to
decide how much loss he/she can take per trade and if that loss continues for a
series of trade how long he/she can stay in the trading profession.
Example: if your
capital is Rs1, 00,000/- you should choose a “percentage loss” that will keep
you protected. I apply “2% rule” so per trade my risk is “Rs 2,000”. Since I
know at max my risk is Rs2000/- my entry and exit should have favorable risk
reward. I can’t risk Rs2000/- for a profit of Rs1000/-, always look for minimum
1:1 risk-to-reward ratio, means if I risk Rs2000/- my profit should be above
Rs2000/- (or) minimum Rs2000/-.
So even if I get 10 straight series of losses my total loss will
be Rs20000/- and I will still have my capital protected. Remember you have stay long
in this profession to be successful. Any good trading system will not let you
have 10 straight series of losses unless its fundamentally weak.
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