Myth Of Low Risk Trading

Posted in: Trading Article

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I recently received an email – marketing email really – about a Low Risk – High Reward trading strategy.

There’s no question that the words “Low Risk – High Reward” caught the eyes of more than a few people.

Which trader doesn’t want to to get involved with low risk trading coupled with a high reward?

The problem is that low risk has a few meanings and not knowing the difference can get your trading account in a whole heap of trouble.

What is Low Risk Trading

We can say that in a low risk trading setup we enter a trade with a stop fixed as a low percentage of a trading account.  The question then becomes what is the high risk percentage on a trade?

For me, low risk translates to amount risked on the trade and would depend on the setup I am using.

An example would be a failure test of an important prior high or low on my trading time frame.

Check this chart out.

low risk trading

  • The grey dotted line (a) represents a high off to the left of the chart that met my criteria for an important turning point
  • The green candle market (b) indicates price breaching this level and while buyers drove it higher, sellers stepped in strong to close well of the highs.
  • The red candle (c) closes back inside (indicating failure of this break).
  • The entry candle (d) is simply showing the entry as soon as candle (c) closes
  • The exit (e) marks the close of the trade at a structure point.

This is a nice and clean trade entry however many times price will breach the high of the (a) candle where the stop is located.

Price will then turn around and print another (b) candle giving another entry that plays out to target.

The stop out and reverse is simply the same pattern playing out in a higher time frame.

The expected stop out and reverse is accounted for and the first trade is always entered at 1/2 of the usual position.  This makes it a low risk trade in comparison to other types of setups because the dollars risked is less.

But…..

I doubt that is what is meant by the marketing emails.

Random Wins & Losses

From some of the material, the marketer was implying that the risk of taking a losing trade was low.  Any method has a random distribution of win and losses…so much so that a former trading mentor of mine ( who has since retired from trading hypetrading and now just enjoys life ) said he expected every single trade to fail!

You can never know if your next trade is going to be a winner.
(if you could with 100% who wouldn’t load up the boat???)

All we can know is that our setups have a positive expectancy and we step up to the plate every time our setup presents itself.  We want to take advantage of our expectancy and be involved in anything that fits our trading criteria.

The marketing material also puts “Low Risk Trading” right along side “High Reward trading” in the thought process so it I take it that you will make multiple returns of your X risk per trade.

Bold statement but pretty common in many emails that cross my inbox hyping the next big trading system.

So what is the trick for these “low risk” trades?

  1. Consistent low % risked per trade?
  2. Consistent % risk and tight stop?

I am not privy to their trading course so perhaps they suggest an extremely low fixed risk percentage of your trading account.  Low risk % means a lower dollar amount lost but also a lower dollar amount won.

If that is the case, then you certainly would need, depending on your account size, serious moves in the market to give you a high dollar reward result.  High dollar reward is relative to your expectations and available trading capital.

For me though, what I would consider high reward may be much bigger/smaller than yours.

We can’t control the market so what is the measure for a “high reward” trade?  Good question to ask.

What if they suggest a 2% fixed risk and tight stops?  This would certainly give you a good position size in relation to your account.

However, if the stop is too tight, how many times do you get flushed out before the High Reward trade kicks in?  This can effectively drain your account through a thousand cuts through commissions not to mentions slips and gaps.

Perhaps the only way to get to the bottom of the “LRHR trading” they promise is to ask them what they mean.

So I did.

I was told that the trades are high probability so there is a low risk of not making money.

Take Caution With Trading Systems

It wasn’t worth going into random distributions, outlier events, the many variables that make up the risks in trading, or anything else with them.

As a consumer who may be looking into trading as a part-time endeavor or even taking a serious run at it, be cautious with these types of emails.

They promise success but ignore the reality of trading:

  1. It’s hard.
  2. Very hard.
  3. It rewards very few.

There is nothing low risk about trading.  The best you can do is start yourself off in your trading career under the right conditions.  PTU may be just the trading program you are looking for.

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CoachShane

Trader at Netpicks
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.

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