Trader, know thyself: Get to know your tolerance for risk

Before placing a trade, and again when you are thinking about closing an existing position, you need to consider the maximum profit you can achieve vs. the maximum risk.

Investopedia defines Risk vs. Reward, or Risk-Return Tradeoff, this way:

Because of the risk-return tradeoff, you must be aware of your personal risk tolerance when choosing investments for your portfolio. Taking on some risk is the price of achieving returns; therefore, if you want to make money, you can’t cut out all risk. The goal instead is to find an appropriate balance – one that generates some profit, but still allows you to sleep at night.

Let’s review some past blog posts that went into some of the tools you can use to measure risk vs. reward.

Back in January, we did a series of blog posts on Options Greeks, starting with this one. The Greeks are a good way to analyze the risk dimension before entering any trade.

Another tool we like for calculating risk is the put-call ratio. Learn more in this post from December 2013.

These are a couple of ways to get a handle on the risks involved with a trade, and to gauge your own sentiments. Tradespoon offers great learning opportunities every week with our webinars, led by industry experts. You can see what’s coming up and register here. You can also watch one of our past webinars or training videos. At tradespoon, we want to help you trade smarter!