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 Risk Control - The Only Path to Success

In these immensely turbulent financial markets, the two words risk and control are probably being used together more than any other combination! If risk had been controlled with more discipline through the financial systems of the world, the consequences of excess would have been a whole lot more palatable...

Almost all of the most successful traders throughout history learned early on in their careers (and probably the hard way) that the “Holy Grail” in financial markets simply doesn’t exist. Novice traders invariably search for extraordinarily high win / loss ratios, comforting a demanding ego in their quest to be “right”. Psychologically, after all, this is very seductive.

But, this is addressing only one aspect of trading risk and, arguably, the weakest aspect. It is clear that a win / loss ratio of, say, 70 percent, ego-boosting though it may be, is merely a ticket to ruin if you’re losing twice as much on your losing trades as you’re pocketing on your winners…

This is not to deny that probability risk is a vital component of trading success. However, it clearly is how this risk relates to average wins and losses in actual money that determines whether an account can rise or fall. As we trade more and understand more, the importance of the overall “Profit Factor” becomes apparent -- the win / loss ratio multiplied by the average winner / average loser ratio. This must be above 1.0 over time to give an “edge” to the system or method being traded.