When the risk in trading is justified...

lovethetrade said:
Only if it's the best risk-free rate of return available and the return accounts for everything else I mentioned. (I.e additional risk, initial investment, operating costs, return for labour that you could obtain in the marketplace with your skill level etc
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You must be talking about the positive NPV trading ...
It's good that you are trying to apply the concept from stage 1 finance paper. More realistically, you may apply to real investments. But I don't think you can apply that to trading...
 
You only know in hindsight if it was worth to take the risk or not.
Most traders, especially daytraders have several incertainties (will he survive and ever be able to create a consistent profitable system) that make it impossible to know if the risk is justified. All they can do is calculate the berak even point where the both choices give the same result. From that point he can calculate the hypothetical profits if certain parameters change.

My personal experience was:
  • as a newbie I thought I could make a lot of money.
  • then over the years I understood that things are not always like you think.
  • I started to think it was impossible.
  • and again years later I finally made profits that exceeded what I supposed to be possible when I started as a newbie.
For each person this evolution can be different. Some win and most never win.
 
Probably you want to ask when trading risks are justified. Risks are not justified, they are managed. if you manage risk well, then it is justified.
 
Jamie J. said:
How did you manage to convince yourself that such a risk is the correct decision and the right strategy?
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By having statistics that prove it is: I don't trade any strategy without statistically significant evidence that it has a positive net expectancy. So my answer to the question boils down to "I let the evidence convince me", I think.

Clearly, every time I enter a trade, I have little idea whether it's going to be a winning or losing trade, but I know with a very high degree of probability that my next 300 trades, collectively, are going to have a positive expectancy, and that's good enough for me. Then all I need to do is calculate position-sizing appropriate for things to go as badly as they can (and allow an error factor in case they go even worse than that, because I'm really conservative about position-sizing), and trade the set-ups as and when they arise.

I realise that this makes it sound really easy, and of course it really isn't: statistics and probability are pretty counter-intuitive subjects, and there's quite some learning-curve to working out how to do all that reliably; but once you're very familiar with that, it does then become relatively simple, mundane and even pretty boring, sometimes.
 
If the risks aren't justified one shouldn't be trading.
 
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