Trader Series, Cognitive Enhancement and Learning Methodology Series (4)

Risk and Return

The popular notion in the market that 'high risk leads to high return' oversimplifies the complex relationship between risk and return.

True risk management is not merely a simple calculation of potential losses but a comprehensive understanding of uncertainty.

Professional investors do not simply pursue a proportional relationship between risk and return but seek opportunities with 'risk asymmetry', where potential returns far outweigh potential risks.

This understanding allows them to identify truly high-quality opportunities among multiple options that appear to have the same level of risk.

The multidimensionality of risk is often overlooked; market risk is just the tip of the iceberg, and traders must also pay attention to liquidity risk, leverage risk, psychological risk, and systemic risk.

On a deeper level, risk management is not just about avoiding losses; it is also a resource allocation strategy aimed at optimizing the overall performance of the investment portfolio rather than the outcome of a single trade.

Successful traders understand that the greatest risk often comes from not understanding the risks they are taking or misjudging the nature and magnitude of those risks.

In an uncertain market environment, the ability to protect capital is as important as, or even more important than, seeking returns.

True risk wisdom is not about seeking to eliminate risk, as eliminating risk also means eliminating profit. One must learn to dance with risk, transforming it from an enemy into an ally.

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