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[shadow]

Ok so risk, not touched upon too much. How do you assess it? How do you cope with it? How do you manage it? Those questions seemed to have been on my mind lately so I’ll take a nice dive into them. Risk seems best when over measured. It seems all to well that things don’t go the way you want them to, they tend to fall off the beaten path. You might even say those that head toward this path tend to find them, but that�s for another time. Anyways over measuring risk is mainly how to deal with losses when your numbers tend to slip from that grip of yours. It could be said and has been said that trading can be compared to driving, whether you take it at 100 miles per hour or 1 mile per hour, you�ll get there with the same tank of gas. This seems true for stops, as you try to optimize you realize that all your plans are skewed the results even anger you. The truth is that IMHO there is a max to every level of every risk/reward ratio, I do not know it, and I will continue to look for it but for now I�ll keep the one that works for me. Assessing risk comes with a plan, but the planning part is not important it�s how you plan. Study, gain experience, ask questions, and make mistakes, and you will know how to assess risk. I�m always open to money management topics, wether it be trading or not, they seem to help me in some way with my method. Since not all methods are the same risk must be assess differently along the same plain(contradictory?). If you assess risk with a different view but hold the principles to assessing risk it should work. So how do you cope, well that�s knowing the risk and realizing if it works or doesn�t. All to well psychologically you are at war with yourself, but knowing the risk through assessment and studying what the risk is will allow you to cope. Managing it can be the same coping, you must assess it. So really there is only one question, how to assess risk? Now of course these are just my thoughts all are welcome eh! And for a final note just remember knowledge is a great way to cure fear be it specialized or not. Never give up seeking more knowledge.

Best, have a good one and later eh!

[toptick07]

And for a final note just remember knowledge is a great way to cure fear be it specialized or not. Never give up seeking more knowledge.

Excellent topic, Shadow. It�s interesting how we associate risk and fear. We all know the numbers by now and there are several spirited conversations in threads on this forum covering the mathematical aspects of risk management. Allow me to take a slightly different tangent� Remember that this is just an opinion. You must do your own research and demo, demo, demo before going live with an idea.

We have all heard the quote attributed to Warren Buffet: �Risk comes from not knowing what you�re doing.� Duh. It seems so simple when you hear it stated like that. So, how does that apply to risk in trading? Maybe an example will help. Feel free to add your own experiences.

If you use candlestick charts and are familiar with the major �stick patterns� then you know what a Hammer or Hanging Man is and how powerful a signal it can be. (Introduction to Candlesticks - StockCharts.com Some basics are here if you�re interested. I am not endorsing this or any other site. It is for information purposes only. I use candles�because I like all the pretty colors.)

OK - What�s this got to do with risk?

What if your research showed that each time you found one of these two candle patterns at the end of a swing high or swing low on your chart, the pair reversed and retraced at least .681 of the swing? We all know from our own experience that no pattern or indicator is 100% accurate. What if the expected reversal played out only 75%, or 65%, or 55% of the time when the pattern appeared? What if the retrace is only .382 or .500? Hmmm. What to do? Well, I�m no scholar, but maybe we can apply some elements of the scientific method.

We have made what appears to be a valid observation about a candlestick pattern and reversals. We know this because we have seen it repeatedly on our charts. Now we need to see how often the pattern proves accurate and if there are any other factors we can identify that can weed out poor signals. So, we conduct further research that shows us that these patterns are tradable for a profit only under certain conditions or after swings of a certain length. We also find that we can limit our drawdown on the inevitable losers by setting our stops at the right place. Perhaps we also find that this pattern is most effective on 4H, daily, or weekly charts.

We then create a set of guidelines for entering and exiting based on our observations�which we will demo before going live! Right? Right! Now we have tested this idea and arrived at the conclusion that it is a valid signal. [U]More importantly[/U], we have a fair degree of confidence in our proven observation and the set of guidelines which we have successfully demoed. We can go forward with a plan to observe the pattern occurring, check additional confirming conditions, and execute the trade according to the guidelines we established in a live account. This trade set-up, [U]when taken in context of our research[/U], is �low risk�.

Why did I drag you through all that? By thinking through our trades and choosing only the best set-ups, we can trade confidently and eliminate many hazards of to both our account equity and our sanity. That�s risk management. Happy hunting�