Risk and Reward

"Trading commodities is risky -
that's why the rewards can be so high."

This statement bears out the truth that risk and reward are closely linked.

The major attraction of commodity trading is the potential for big gains - but it is possible to allow yourself to be blinded by the return prospects, or even to be unaware of the risks.

The temptation to speed up returns by increasing position sizes is strong and it is a common failure for private individuals to lapse into overtrading, simply through lack of knowledge.

The definition of overtrading used here is - taking a risk which is not justified by the prospective return.

So how do traders keep these factors in perspective?

They do it by constructing their systems so that the return they require and the level of risk they are prepared to take are predetermined. The limits for return and risk are referred to as 'trading goals'.

The trader's goals are the very foundation on which his systems are constructed and are the first inputs to his evaluation and assessment process.

Broadly speaking, the stages of the evaluation process are:

• Market selection
• Goal setting
• Risk resonance
• Parameter selection
• Goal achievement

If the system being assessed meets all his requirements after thorough evaluation, the systems trader can feel comfortable delegating it to his computer for trading (without interference). Risk is always present but by constructing systems that balance risk with potential reward and removing the opportunity to interfere, experienced traders know they give themselves the best chance of success.

 

Modus Trading
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Copyright David Bromley 2006
All Rights Reserved.

 

 

 

 

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