Money Management

Is Low Risk Trading Possible?

A common perception among the general retail investing and trading public is that in order to garner large profits, you must take on big risk. So where does this view come from? Who perpetuates it? And is it necessarily true that low risk trading isn’t possible?

Can Low Risk Trading Result in High Profit?
This view comes from the fact that most people perceive volatility and leverage as high risk. Therefore, if one engages in the markets during periods of high volatility using a leveraged product, the odds are very low (high risk,) but the profits can be huge if things work out. This is the common perception.   In essence, the belief is that because most people are risk-averse they should settle for only mediocre returns as higher returns are only reserved for those willing to take on higher risks.

I’m sure most of you know that a belief system is not always created on the basis of factual information, but sometimes on a lack or distortion of information. In other words, ignorance can also produce beliefs. In this case, there are many folks that have a vested interest in telling you that low risk is commensurate with low returns.  These are the same people that tell you that it’s impossible to time the markets, so don’t even try. The lesson here is to be careful where you get your information and make sure you always do your homework.

As to whether there is any truth to the idea that there must be high risk in order to have high profit margins, long time readers of these articles know by now that it is indeed possible to take trades with very little risk when you can find the turning points. On one hand, it’s as simple as finding where the institutions have their unfilled orders.  But on the other, implementation can be very challenging for some.

When we look at putting on a trade, the three most critical components are the stop, the entry and the target.  For the lowest risk entry, we should always enter the market as close as possible to the point where we are going to be proven wrong.  This would be where there are pockets of unfilled orders that originate a strong move. We refer to these as supply and demand levels.  In the chart below, we can see what the picture of a low risk entry may look like.

 Placeholder

In it, we can see that the Swiss Franc Futures on this day rallied off a congestion area (highlighted in yellow) and then pulled-back into that zone. The retracement into the zone presented a trader with a very low risk trading opportunity. The reason this was a low risk trade is because the entry was fairly close to the point where the level would be invalidated; put another way, the point where we would be proven wrong.  In addition, since there was no supply for a good distance, this increase the profit potential thus making this trade a great risk versus reward opportunity. In this example, if you had traded one contact of the Swiss Franc Futures, the risk was approximately $337.50 for a profit of $1500, and they told you had to have high risk. This can only be done by having a strong understanding of institutional supply and demand.

Speculating in the financial markets is about putting money at risk with the expectation that for that risk, we will be compensated commensurately. If that’s the case, doesn’t it make sense that we would only take trades that offer the lowest risk, highest probability (no guarantees), and highest profit potential? To do that however, we need a strategy that produces profits on a consistent basis, the self-discipline the execute that strategy and the focus to achieve our goals. Ask yourself if you have any of these when you trade; because if you don’t, you’re most likely taking high risk, low probability and small profit trades, and who wants to do that?

Gabe Velazquez can be contacted on this link: Gabe Velazquez

Gabe Velazquez is a professional trader with 14 years of experience. His focus is intra-day and swing trading the ER2 (Russell 2000 e-mini) using technical analysis as his primary tool. Gabe has managed both stocks and futures accounts as well as conducted educational seminars on technical analysis for the past ten years. He is a frequent guest on Biz radio, where he shares his market knowledge and utilization of technical indicators. Gabe also teaches the 5 day E-mini course for Online Trading Academy.

Gabe Velazquez is a professional trader with 14 years of experience. His focus is intra-day and swing trading the ER2 (Russell 2000 e-mini) using tech...

Brumby

Established member
593 137
Trading inflection points do present high reward low risk opportunities - not exactly a trade secret. However the article fails to develop this theme but merely mention in passing that it can be done by having strong understanding of institutional supply and demand. The other factor not discussed but in my view is equally important is the expectation of such a strategy i.e. the probability factor.
 
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Kear

Member
64 5
Taking a low risk trade, and what you believe to be low risk are two different things. Look at those that got wiped out on a gap when CHF unpegged from the Euro. Without a guaranteed stop you were screwed.
 

tomorton

Legendary member
7,231 962
Taking a low risk trade, and what you believe to be low risk are two different things. Look at those that got wiped out on a gap when CHF unpegged from the Euro. Without a guaranteed stop you were screwed.

Hi Kear - I'm as sorry as anyone for the people who lost in the CHF debacle but as you mention it, its a good example for so many trading principles.

Thing is, the EUR/CHF crash came out of a downtrend, not out of a clear blue sky. Whatever the Swiss national bank were saying, it was apparent from months before 15 Jan 2015 that a large portion of the big market players didn't swallow it. They had driven price down continuously since May 2013 and it had dropped convincingly below every significant MA long before the crash. No traders should have been left long as this would have been highly counter-trend. What else is a classic high risk trade?
 

Kear

Member
64 5
I would never have touched that pair, it was too dodgy for me. Look at Cable, my friend took a long 2 days before the massive drop during Brexit, you could see it failing and losing it's upward momentum, but when l suggested a stop, or at a minimum a hedge, she said no, l'm waiting for it to come back. It's easy to lose friends in this game, can't do right for doing wrong, but we still have to battle our own minds, regardless of the pair we trade.
 
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tomorton

Legendary member
7,231 962
Of course, as lower is the risk, as lower is the profitability - ancient law.

The key word is the one you have used literally, profitability: i.e. ability to make a profit. Just as long as people don't believe the incorrect corollary - i.e. the higher the risk, the higher the PROFIT.
 

NVP

Legendary member
36,506 1,833
there’s some decent nuggets in this article if people read it .......but as usual people won’t


N
 

wallstreetwarrior87

Experienced member
1,332 288
What is low risk?

What is high risk?

Forget that; What is risk?

If it can be defined - why would anyone take a high risk trade?

What is risk related to? Where does timing come in? Does probability exist?

Is risk related to probability????

So many questions still left unanswered after reading the article. All it seems to say is to look for areas of past price rejection - then enter with a tight stop just under:cheesy: (well there is a bit more than that, but you get the gist)

So is the stop the risk??? I dont think so lol:whistling


Also profit potential is not related to risk. Price is going to go where it goes. This aint fixed odds!
 
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FXX

Experienced member
1,140 195
When I see articles like this it makes me chuckle. Betting on price moving in a specific direction because historically price reacted to a level, is like buying a lottery ticket with the same winning numbers that won in a previous draw and expecting to win again. The drivers of price cannot be attributed to level (besides pegs being protected), indicators, or pocahontas patterns. As wallstreetwarrior said it doesn't dive into what risk is and merely categorises it based on historic price levels and a stop. Not only that but it could also be said that showing a specific chart that supposedly proves the narrative is nothing more than an exhibition showcasing hindsight.

Risk isn't a singleton it is comprised of many factors like risk events, sentiment, unscheduled events, monthend flows, option barriers, central bank intervention, political and geopolitical. The list goes on. You can't define risk as simply placing a stop at a level where price previously reacted. If it were that simple then everyone would be millionaires.
 

NVP

Legendary member
36,506 1,833
good points ............

i would strongly recommend traders reading more widely on Risk management and indeed the nature of Risk in its many many forms

Risk is widely misunderstood and misquoted in most speculation and trading matters ....

having a true understanding of the risk inherent in any decision is actually a very rare thing .....as many elements of the risk involved are either not included (ignorance) or misunderstood and undersestimated (even more ignorance)

N
 

NVP

Legendary member
36,506 1,833
my only advice on trading is this ...

a potential trade is deemed a no trade unless you can find a very very strong reason to Trade it ...

and not vice versa .....

This is the trait of failed traders who generally overtrade and also take far to many poor quaility trades

N
 
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