The Difference Between Risk Avoidance and Risk Control

The Difference Between Risk Avoidance and Risk Control

Risk and reward are inexorably linked. You cannot consider one without the other. If you have decided to explore trading as one of the ways that you make your living or as a way to augment income whether in retirement, beginning years of your adult life or somewhere in the middle, you have chosen to consciously be aware of levels of risk and their associated reward.

Often people are intimidated by the idea of risk but what they don’t realize is, they make simple reward to risk calculations every day of their lives. Risk is all around you, and risk is your friend. But risk is the friend who will take you out on an all-night bender and send you home to an angry household if you don’t control it.

 

That is the key; risk is to be controlled, not avoided. As mentioned above, you do simple risk reward calculations every day. You’re driving your automobile and you’re approaching a light that’s been green for several seconds. Your brain is already calculating that it’s probably due to turn yellow and subsequently red. If you’re late for a meeting, you may speed up to get to it before that happens. If you’re on your way to your in-laws for dinner, you may take your foot off the gas and cover the break knowing that with the remaining distance in front of you, if it turns yellow and you don’t stop you may be subject to a ticket or worse. Your brain is doing a risk to reward calculation. If you are lactose intolerant and you go to a friend’s party and they offer you a slice of double cheese pizza, your brain makes a quick reward to risk calculation. Where’s the pizza from? How far am I from my bathroom? (I think in this example the reward is obvious, it’s pizza!).

For some reason in trading, risk is looked at in the extreme. People look at a trade as too risky, and walk away or they enter trades thinking risk is something the other guy has to worry about. Risk avoidance for a trader is a fatal as risk ignorance. A trader once asked, “How do I protect myself from events such as the Swiss Central Bank removing the Euro peg in 2015?” (If you’re not aware of this event, google the exact phrase above,.. the pair moved 30% in a day). The short answer is, there are risks you can calculate and risks you can’t see coming, let alone account for. The only part of risk in trading that is fully in your control, is the amount of money you place at risk.

The easiest way to control this is by using Nadex binary options and spreads. You cannot place a trade on Nadex that you cannot afford, and the risk you take is clearly shown on the order ticket before you hit “buy” or “sell”. Trying to control risks by not trading because of the possibility of unforeseen risk, is like passing on a job offer because the office building might burn down. Eat the pizza. Just don’t eat too much…and make sure the bathroom is close.

The information contained above may have been prepared by independent third parties contracted by Nadex. In addition to the disclaimer below, the material on this page is for informational and educational purposes only and should not be considered an offer or solicitation to buy or sell any financial instrument on Nadex or elsewhere. Please note, exchange fees may not be included in all examples provided. View the current Nadex fee schedule. Nadex accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representations or warranties are given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk and any trading decisions that you make are solely your responsibility. Trading on Nadex involves financial risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results. Nadex contracts are based on underlying asset classes including forex, stock index futures, commodity futures, cryptocurrencies, and economic events.

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