Is Trading Risky?

Trading on the stock market is often associated with risk and compared to gambling. It is true that trading and gambling share some common traits. Both involve an element of luck, as well as skill. Secondly, the technological advancements bring about some changes, such as the appearance of the VR casinos has revolutionized the industry. Both playing virtual reality games in the best VR casinos and trading offer a chance to earn huge amounts of money, but they also involve uncertainties and risk. Money management skills, strategy and discipline are essential for both, and in both there is an important difference between reckless behaviour and controlled risk. Finally, trading can be equally thrilling and immersive as gambling.

Still, there is one crucial difference – the edge. In trading, if you have the edge, you will be able to tilt the probability in your favour, whereas in gambling there is no way to do that, as probabilities usually depend on mere chance.

Learning to trade like a professional is all about having the edge and controlling risk. You should know your market, your methods and your style. Professionals know how to make a system that fits their personality. They understand their strengths and weaknesses and make sure that the latter don’t affect their decisions.

Another important thing in managing risk when trading, which is similar to gambling, is knowing when to stop, even when it means taking a loss. The professional traders also know when to cut losses and scale out of their position when conditions get worse.

Another way to reduce risk is by avoiding betting too much on a single trade. It is important not to be guided by emotion in your trades, such as in impulsive position sizing: putting too little or too much weight on individual trades without clear rules increases risk as it makes your account more volatile. On the contrary, you should resist emotional pressure and realize that one trade is meaningless compared to your entire trading career.

Choosing your broker wisely can also help a lot with risk management. Always check the broker’s regulation, negative balance protection and the withdrawal policy. To protect yourself from broker related risks, don’t put too much of your trading capital into your broker. Stick to 20%, but treat it as if it’s your entire capital.

Amateurs often don’t understand market conditions: high and low volatility, momentum trends or ranges, etc. That is why they often can’t correctly judge when to trade and when to stay out. They don’t use stop, which is a basic precondition for successful risk control.

Trying to catch up and break even is another common beginner mistake and a paradigmatic example of reckless trading. Even adding to losses must be carefully planned and calculated in advance.

Another ground rule that is similar to gambling is never to risk what you can’t afford to lose. You should always be prepared for the worst-case scenario and develop a backup plan. Again, risking money you need too much will put pressure on you and cloud your judgement, which will almost certainly result in a failure.

In conclusion, in trading it is important to understand the difference between risk and variance.

Variance is a normal part of the trading process. It involves swings in your account balance that exist because you can’t control the outcome of the trade. Losses due to variance are normal and you should learn to accept them and move on.

On the other hand, you are engaged in a risky behaviour when you don’t know what you are doing, you don’t have a clear plan, or you deviate from your plan guided by emotion.

Therefore, although you can’t determine whether a trade will win you money, you can and should limit and control risk when trading.

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