Risk, DrawDowns and Consistency are More important Than Big Fat Profits

risk

Every once in a while, I get asked about my career as a Full Time trader and I am usually happy to share. Typically, they would ask me:

How much money do you make?

and they often followed with

I know another trader who makes X amount of money.

.

I’m usually fine with it especially if they are not familiar with trading. However, it does really annoy me when the same questions come from a trader who trades a real (money) account. It just shows that he really has no clue with what he is doing.

With that, I will be discussing on things that really matters to traders – unfortunately, it has nothing to do with Profits.

Risk

If you truly aspire to become a full time trader, you really need to start focusing on the right thing. So, the next time you hear another trader talks about how much he/she makes, make sure to check how much is the risk in return for his/her rewards.

For example, saying that Trader A makes $1,000 a day, that means nothing if you don’t know what his risk strategy is. If Trader A is risking $5,000 for a return of $1,000, he trading system is far worst than Trader B, who makes $1,000, but is only risking $500 for the same return.

In terms of Reward:Risk Ratio, Trader B has a 2:1 which is far greater than Trader A’s 0.2:1.

As shown, knowing how much a trader is risking gives you a better idea of what you’re getting back from your initial investment. And this is what you, as a trader, should be focusing on as well.

DrawDowns

Another important area that traders need to appreciate is Drawdown. According to Investopedia, the definition of Drawdown (see Investopedia) is:

The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted as the percentage between the peak and the trough.

Being a full time trader as well as an investor, you need to know, understand and appreciate that trading is about winning AND losing at the same time. You don’t know the future and, hence, you should focus on the potential losses before you focus on the potential profits.

As the saying goes

Cut your Losses and Let your winners Run.

Knowing what your losses are is just another way of cutting your losses.

Consistency

not losingIn my view, the easiest way to explain consistency is by using the word Repeatability.

This is a crucial part of trading that many often overlook. As mentioned at the start of this article, people have been programmed to think about “money and cents” but they forget that being able to repeatedly reproduce profits (though some profits are not big fat ones) is more important than the profit in itself.

More importantly, being consistently profitable means that the trader/investor is NOT LOSING his hard earn money. And this is the missing puzzle that many traders are looking for. If traders start focusing on reducing your losses, those big fat profits will, slowly but surely, come.

Conclusion

The first time you make a mistake its an accident, the second time you make the same mistake its on purpose, and the third time you make that same mistake… well, its no longer a mistake, its a habit.

If you just realised that you have been focussing on Trading Profits all this while, then I think it’s time to learn and let go. Believe it or not, you don’t need to know how much your profits will be to be profitable. All you need to do is cover your downside and let your upside take care of itself.

Thank you and Happy Trading!!

 

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