The Road to Successful Trading

Establishing your risk profile 
 
What do you prefer… to make a trade that will give you a potential return of 100% but with 
only a 10% chance of winning or would you prefer to have a trade that would yield a 15% 
gain and have a 60% chance of winning? Will you require your system to provide a fairly 
consistent win-loss ratio of 75% or 60% before you start real-money trading? Will you trust 
your own analysis or will you lean heavily on recommendations of others? 
Consider the following examples. A very popular strategy is writing stock options which are 
akin to selling insurance. It’s not very exciting but it can provide a fairly low level of risk 
but with a fairly low level of reward-about 2-8% per month. But if done successfully on a 
fairly frequent basis, the annualized returns can be impressive. In other words, it is vital to 
set your goals and then consider the best strategy in terms of risk-reward to achieve the 
monthly objectives to reach your yearly goal. 
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Another strategy is to use strategies that identify stocks that may be breaking out or down 
and try to catch the wave. Rewards can be substantial as other investors rush in to partake in 

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the frenzy. The trader let’s profits run and exits with a large profit. Which strategy appeals 
more to you? Would you rather trade more often with lower gains or less frequently with 
larger gains? You can only do that after setting your goals and then find a trading style that 
best matches your risk profile and how you plan to trade. 
The following is a questionnaire usually provided by a brokerage to new clients to help the 
broker establish the new client’s risk profile. Helping to determine risk tolerance helps the 
trader to better define the most appropriate strategy for the level of risk. For example, a risk 
adverse trader would lean toward hedged positions like vertical spreads or writing covered 
calls or puts. A more aggressive trader may take a much more predatory strategy and “stalk” 
highly volatile investments with the purpose of making fewer but more profitable trades.
Each trading strategy requires a different set of parameters and trading rules.
Risk Profile Analysis
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By identifying your risk profile and specific financial goals, you will be better prepared to 
look for a strategy that best matches your profile. Unfortunately, some aspiring traders find 
that their trading capital can only meet financial goals by assuming an aggressive trading 
strategy. This can be a real mismatch if the trader is risk adverse.
It is very important to first determine if your trading capital can realistically produce the 
financial goals you want to achieve. 
During the process of evaluation, you may have to re-adjust your goals. For example, if you 
have a five year plan but see that the trading capital will not realistically allow you to reach 
your goal in five years, you may need to either adjust your time horizon or select a more 
aggressive strategy. But be warned that if the strategy isn’t compatible with your risk profile, 
trading will be very stressful and more than likely, short lived.