The Road to Successful Trading

Risk and Reward 
 
The optimum trade offers low risk and high reward. Unfortunately, not many trades become 
optimum trades. In fact, most types of investments can be measured as far as its risk by comparing 
its price performance over time with that of the average price of the market in which it trades. For 
example, stocks have a parameter that measures individual stock correlation with that of the index. 
This is referred to as Beta. A beta of 1 means a stock has about as much variation in price as does 
the market it trades in. A stock with a beta of 1.25 means that the stock has 25% more variation 
(risk) than the market it trades in.
If a trader is hunting for large gains, high beta stocks would most logically bring higher rewards 
because of the risk premium. If you are a trader who doesn’t like much risk, you will need to have a 
strategy that will provide many low profit wins that will add up to an attractive sum over time. If 
you are a trader with a higher risk tolerance, you may look for trades with larger risk but offer 
higher rewards. Normally, this means a lower win-loss ratio than that of a risk adverse trader. 
But measuring risk can be itself risky. There are times when a normally low risk stock or 
investment can become very volatile. As a result of this fact, there is some controversy about using 
measures of risk as measured by the Normal Distribution of data. A fundamental event such as the 
development of new technology, an industry in crisis or other macro events can send the statistical 
relevance of Normal distribution out the window. For example, a certain event may “normally” 
move out two standard deviations only 1% of the time. But in many stocks, it is often seen that 
large price movements can happen much more often than predicted by Normal Distributions of 
data. As a result, most traders understand that all trades have risk and take measures accordingly. I 
know that you may have a hard time understanding what I just said, but this is a very important 
reality when talking about of measurement risks and what might be considered as more or less 
risky.