forex trading

Risky Trading vs Risk Averse Trading

Daksh Murkute | | |

No two traders would be the same. One trader would trade risky while the other trader would be more of a risk averse type trader.


These are things that depend on the trader’s own personality, and the sooner you identify this for yourself, the better and smoother your trading journey becomes.


But, how to do that and how to know if you’d be more suitable to trade risky or risk averse? Well, you’ll learn that in this blog post.


In this blog post, I’ll first differentiate risky trading and risk averse trading and then in the end I’ll tell you how to know which one would be suitable for you.




What is risky trading?




Every trade that we take, will have some risk parameters. It would either be a specific stop loss, or position size, which depends on the risk capacity in each trade which is usually 1% to 3%.


Now, risky traders would simply exceed these parameters. They would either have a tighter stop loss, a larger position size, or they simply risk more on each trade.


Why do traders trade in such a risky way? There could be two reasons for this.


Either they have a lot of confidence in the system they are trading or they are just greedy.


The first reason is the best reason to trade in a riskier manner and if you are doing it because of greed, then just leave trading for good or else you’ll blow up your capital.



What is risk averse trading?




If risky trading is about exceeding risk parameters, then risk averse trading is when the trader trades within those risk parameters or below it.


They either keep the stop loss just where it is supposed to be or they would keep it a bit larger just to be sure. They would trade with just the right position size or smaller. And risk averse traders never risk more than 1% to 3% in each trade.


Why do risk averse traders trade this way? Either they just don’t like taking additional risks or they are just afraid.


I personally think that risk averse traders aren’t necessarily scared or anything. They are just taking care of their trade’s downside.



How to decide which one’s suitable for you?




As I said in the beginning, this is more of a personality test than a trading style test. And to know this, I need you to ask yourself one question:


Would you rather risk more to make more or would you rather risk less to lose less?


I know that this is a tricky question but I feel that it very nicely encapsulates the aspects of both risky trading and risk averse trading.


The main thing that risky traders think about is the returns they can get if they trade larger. On the other hand, risk averse traders think about limiting their risk and hence, limiting their losses.


Now, getting back to the question I asked earlier, you need to know if you’re comfortable knowing that you can earn more but are also exposed more, or if you don’t mind earning less by being less exposed to risk.


It all boils down to this simple thing but it takes traders some time to actually realize this.


Now for me, I don’t like taking overly risky trades even if it can fetch me higher profits. I identified that I’m just built like this and risk averse trading is suitable for me.


Also Read: 5 myths about being a trader



Important thing you need to know




Before you decide what kind of risk profile would be best suitable for you to trade with, I need you to know some important things.


Beginner traders start their trading journey with the wrong mindset, they look at trading as a get rich quick thing, and this makes them trade in an overly risky manner.


If you are someone doing that, then just stop. Revaluate your priorities and expectations, and then only get back to trading.


On the other hand, if you are a risk averse trader, then is it because you are just afraid of taking a loss, and is that why you are risking less?


If that’s the case, then you should first start by getting comfortable with taking a loss or else you might just keep risking less, earning less, and in the end, it just might not be worth all the time and efforts you are putting in.




Are you a risky trader or a risk averse trader?

I believe that after reading this blog post, you might already get some idea of what type of trading would suit you best.


So tell me, do you like taking risks to earn more or do you like to protect the trade’s downside first and risk less?


Don’t forget to share this blog post with others and also, feel free to reach out to me through the comments section with absolutely anything and I’ll get back to it at the earliest.

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