Is trading a high-risk activity?
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We often hear on television, radio and forums that trading is a high-risk activity. When you tell someone that you are trading, they say to themselves "wow, you have money to burn", as if trading inevitably ends in loss of capital. This popular misconception has a basis, given that the majority of traders lose in the financial markets. We all have someone around us who has had a bad experience in trading. It is a fact, trading involves risks, but these risks are related to other factors.
The general public's perception of traders plays a very important role in trading. People generally discern two types of traders:
- The losers: Those who lose a large part or all of the capital invested.
- The winners: Those who drive a Porsche. This is the caricature trader who earns thousands of euros every month working from home without too much effort.
This simplistic image of traders is harmful for private traders. They come to believe that by trading, they will either make a fortune or raze their trading account.
If they fail, the loss of capital is almost considered normal, this is the lot of a losing trader.
If they can make some money, it is not enough. A good trader must earn a lot of money.
This distorted image puts pressure on traders to take ill-considered risks in their trading. Winning €100 doesn't interest them, what they want is to change their life. It doesn't matter if they have to risk all their capital to get there. Add to that the spirit of competition between traders who push them to take more risks to show that they are the best (we see this with trading competitions and even among seasoned traders). Greed and ego are nasty defects.
Depending on the market in which the trader invests, he accepts more or less risk. Forex, for example, is considered by individuals to be the riskiest market. Yet this is the market with the lowest volatility, far behind the commodity and equity markets. But there again, the trader's perception is distorted by a bad image, a preconceived idea implanted by the thousands of traders who have lost on Forex through the abusive use of leverage and mismanagement of their emotions.
It also annoys me deeply to see Forex criticized like this when it is a market like any other. Many people criticize it when they deserved to lose, by not listening to advice and thinking they are better than others. Losing money in trading when you're a novice is normal, but losing all your initial capital is not!!!! If you have lost all your capital, you have neglected risk management. Without money management, it is impossible to earn money in trading. The important thing is not to win all the time, but to try to last, (the time it takes to be well trained).
On the equity markets, it is amusing to observe that the behaviour of traders is different from that of Forex traders. On shares, losing all your capital is not allowed. Each investor sets a different loss threshold and the notion of risk/return is more entrenched. Why allow yourself to lose all your capital on Forex and only part on equities?
There is no intelligent answer to this question (I myself made a distinction between each market when I was a beginner). All this comes once again from the image that we perceive of this or that market, the image that society gives them.
Not all financial products carry the same trading risk. Some are riskier than others but in the majority of cases, it is possible to have acceptable and controlled risk. Acceptable risk is not allowing yourself to lose all your capital, it is finding a level of risk that doesn’t eat into your trading account too much if the trade goes wrong. I am talking about a risk between 0.5 and 2% per trade.
Novice traders often only think about the possibility of winning, but it is also important to consider that a trade is going badly. You can do the best analysis in the world, it's the market that decides. Losing trades are part of trading, even for the best of us.
The first thing new traders often look at when choosing a financial product is the leverage available. The larger it is, the more investors it attracts. Brokers understand this well. That's why Forex and CFDs are booming. Leverage is considered a friend even though it is one of the trader's worst enemies.
Trading is a risky business but no more so than any other investment. If a trader imposes strict money management on himself, it is impossible for him to lose all of his capital. What makes trading dangerous is the way traders perceive the financial markets. We get rich or we lose everything! That's not true! If you scrupulously respect money management rules, trading is no riskier than investing in buildings. By buying a house, you can suffer a collapse in the real estate market and there is nothing you can do about it. Trading offers you the possibility of protecting yourself against risks but you just need to have the will to impose certain rules. Trading becomes risky due to misuse of the tools available to traders.
The risk linked to the poor image of traders
The general public's perception of traders plays a very important role in trading. People generally discern two types of traders:
- The losers: Those who lose a large part or all of the capital invested.
- The winners: Those who drive a Porsche. This is the caricature trader who earns thousands of euros every month working from home without too much effort.
This simplistic image of traders is harmful for private traders. They come to believe that by trading, they will either make a fortune or raze their trading account.
If they fail, the loss of capital is almost considered normal, this is the lot of a losing trader.
If they can make some money, it is not enough. A good trader must earn a lot of money.
This distorted image puts pressure on traders to take ill-considered risks in their trading. Winning €100 doesn't interest them, what they want is to change their life. It doesn't matter if they have to risk all their capital to get there. Add to that the spirit of competition between traders who push them to take more risks to show that they are the best (we see this with trading competitions and even among seasoned traders). Greed and ego are nasty defects.
The risk linked to the choice of financial market
Depending on the market in which the trader invests, he accepts more or less risk. Forex, for example, is considered by individuals to be the riskiest market. Yet this is the market with the lowest volatility, far behind the commodity and equity markets. But there again, the trader's perception is distorted by a bad image, a preconceived idea implanted by the thousands of traders who have lost on Forex through the abusive use of leverage and mismanagement of their emotions.
It also annoys me deeply to see Forex criticized like this when it is a market like any other. Many people criticize it when they deserved to lose, by not listening to advice and thinking they are better than others. Losing money in trading when you're a novice is normal, but losing all your initial capital is not!!!! If you have lost all your capital, you have neglected risk management. Without money management, it is impossible to earn money in trading. The important thing is not to win all the time, but to try to last, (the time it takes to be well trained).
On the equity markets, it is amusing to observe that the behaviour of traders is different from that of Forex traders. On shares, losing all your capital is not allowed. Each investor sets a different loss threshold and the notion of risk/return is more entrenched. Why allow yourself to lose all your capital on Forex and only part on equities?
There is no intelligent answer to this question (I myself made a distinction between each market when I was a beginner). All this comes once again from the image that we perceive of this or that market, the image that society gives them.
The risk related to the financial products traded
Not all financial products carry the same trading risk. Some are riskier than others but in the majority of cases, it is possible to have acceptable and controlled risk. Acceptable risk is not allowing yourself to lose all your capital, it is finding a level of risk that doesn’t eat into your trading account too much if the trade goes wrong. I am talking about a risk between 0.5 and 2% per trade.
Novice traders often only think about the possibility of winning, but it is also important to consider that a trade is going badly. You can do the best analysis in the world, it's the market that decides. Losing trades are part of trading, even for the best of us.
The first thing new traders often look at when choosing a financial product is the leverage available. The larger it is, the more investors it attracts. Brokers understand this well. That's why Forex and CFDs are booming. Leverage is considered a friend even though it is one of the trader's worst enemies.
Conclusion
Trading is a risky business but no more so than any other investment. If a trader imposes strict money management on himself, it is impossible for him to lose all of his capital. What makes trading dangerous is the way traders perceive the financial markets. We get rich or we lose everything! That's not true! If you scrupulously respect money management rules, trading is no riskier than investing in buildings. By buying a house, you can suffer a collapse in the real estate market and there is nothing you can do about it. Trading offers you the possibility of protecting yourself against risks but you just need to have the will to impose certain rules. Trading becomes risky due to misuse of the tools available to traders.
