Stocks & Commodities V. 22:10 (52-55): Risk/Reward In Trading by Don Bright
Every investor and trader has been taught to be fearful of risk in the marketplace. That makes sense, right? You have to be cautious with your money, right? You have to limit losses, right? Well, maybe not.
As in most other things, risk in the marketplace comes
with a counterpart: reward. These rewards can be financial, physical, mental, or even emotional. We all risk so many things every day, from the moment we get out of bed in the morning, head to work in traffic, engage our peers in conversation, and otherwise negotiate our way through day-to-day life. Even matters of the heart involve risk and reward; how many people are too afraid of rejection to pursue a satisfying relationship? For now, though, letís just take a look at risk and reward in the investment and trading world.
So many of my learned peers support the theory of tight stop-loss methods when investing or trading. This seems to make perfect sense on the surface, but look a bit deeper. If you buy 100 shares of stock at $50, and hope to get an annual return on investment (ROI)
of 12%, the stock would have to rise by $6 annually (assuming there were no dividends paid). To protect
yourself from ruin, you can enter an initial stop-loss sell order to trigger at a predetermined price. How much should you limit your loss? How does this individual stock movement affect your overall portfolio?