Affected by the media and some scandals, the general public thinks that traders like to take risks and enjoy speculation and gambling. But, every successful trader does not admit that they prefer risk.
"I hate risk very much. If I had a chance, I would rather earn a stable $10,000, and I would never consider a 10% chance of earning $100,000. In terms of economics, my utility function is concave to the origin."
The so-called trading risk, of course, refers to price volatility. Talking about price volatility inevitably involves the concept of probability. Based on the historical price volatility of a specific stock, we can estimate the probability of the stock reaching a certain target price.
Therefore, risk, price volatility, and probability are inseparable concepts (in the quantitative model of financial trading, risk is usually defined as the standard deviation of price distribution.
Of course, the price distribution considers the price as absolute price, relative price, or asset return. The price volatility considered by options is usually the standard deviation of the underlying asset return rate distribution).
Excellent traders will wait for the highest chance of winning. In other words, the probability of a favorable trend is the highest and the probability of an unfavorable trend is the lowest.
In addition, unlike amateur traders, excellent professional traders understand one thing, that there is not necessarily a positive linear relationship between risk and return. In some cases, you can find trading opportunities with extremely low risk and extremely high returns.
"The point is that you have to deal with risk from a rational perspective, and you also need some imagination. Excellent traders know how and when to take risks, and they also know how and when to avoid risks."
"Some risks you have to take, some risks you can't take. The key is how to distinguish between the two. You don't need to take major risks to win major profits."
"Many trading opportunities contain considerable profits, but the risk is not particularly high. Studying the relevant market conditions and trading objects may require a lot of time and energy, but the actual investment of funds may not bear too much risk."
"There is a story about an economist. The economist and his friend were walking on the street in New York, and his friend saw a hundred-dollar bill on the sidewalk, so he pointed to the bill and said: 'Professor, there is a hundred-dollar bill!'"
"The economics professor replied indifferently: 'Impossible if it is a hundred-dollar bill, it would have been picked up by someone.' But, I think there are many low-risk money-making opportunities."