An old adage says, “Any trade is worth doing, as long as you know your risks…”
Quantifying and controlling risk is the number one objective of an investor. Without knowing the downside everything is just a gamble, with a highly likely bust possibility.
Since trading is a long term endeavor, a risk-reward balance is optimal for success. Reasonable allocation is critical to putting equal weight on each trade. Divide a portfolio into 20 equal pieces so that no single investment can make or break you…
Not to say that more risky pursuits don’t payoff…they can and do. But low odds attacks cannot bankrupt the account.
Strategy #1 – Identifying Market Extremes
Picking a top or bottom turn is a high-risk proposition. Markets can always move higher or even lower than expected, with zero no longer the bottom AKA negative interest rates in many major economies.
While timing that exact extreme before the reversal is more than challenging, the good news is that a modest dollar amount is often at risk to new higher highs or lower lows.
Most money is made on established trends as opposed to picking the exact end to a run. But when you do… the mental and dollar payoff is never forgotten…
Strategy #2 – Option Long Shots: Buying Far, Far Out-of-the-Money Calls or Puts
Option odds are easily identified because the pricing model provides the Delta as the rough approximation of the probability of the option being in-the-money at expiration. The 5% or less chance plays can be cheap and can turn into a Peter Lynch infamous four-bagger on an explosive move in the underlying asset.
The common theme in these “risky strategies” is the low chance of payoff. The dollar risks are reasonable in proportion to the overall account and you can live and trade another day…
