Low Risk Trading

When it comes to trading strategies, it seems like just about everybody has their own little scheme for getting massive returns.

Heck, just do a search online and you’ll find people claiming to have the secret to getting 500%, 600%, even 1000% yearly returns.

All you need to do is give them a bunch of money and they’ll reveal their secrets to you.

If you dismiss the outright scams, you’ll find that the ones that promise those kind of returns do so at dramatic risk to your entire portfolio.  Sometimes your exposure can be 10 or even 20% of you’re entire portfolio.

If you have a few losses in a row (and every system will at some point no matter how good it is), you could find yourself wiped out.

Let me give you an example of why you really need to stick to low risk investing strategies and keep your exposure at a minimum.

Let’s say you have $30,000 in your account and you have a few bad trades and your account is reduced to $18,000.

You’ve just lost 40% of your account.  What percentage of a return do you need now to get back to even?

The typical answer is, “Well, I lost 40%, I have to make back 40%.”

Wrong!

Since you lost $12,000, you now have a lower base of money to work with so undoing that $12,000 loss requires you to get a 66.6% percent return on your money just to get back to even.

Remember, you are going to have losing trades and no matter how good your system is, there will be times where you will have multiple losers in a row.

Here’s a breakdown so you can see just how much you’ll need to get back when you lose a percentage of your account.

Drawdown  % To Get Back To Even

10%       11.1%

20%       25%

30%       42.8%

40%       66.6%

50%       100%

60%       150%

70%       233.3%

80%       400%

90%       900%

Are you starting to see why professional money managers are only willing to risk at most 2% per trade and more often it’s .5% or 1%?

Even if you have 10 consecutive bad trades, if you’re risking 1-2% of your account, you’ll be down about 20%.  A good trade or two can make that up.  Beyond that, however, and you’re entering risky territory.

As far as low risk trading goes, there is one system that I recommend above all others.  It takes only 5-10 minutes per day to do after the markets have closed, and averages a 6.43% return each month.  (With monthly compounding, that’s over 100% a year.)

It’s called ETF Trend Trading, and it’s really an amazing system and definitely a low risk system.

Here’s an interesting piece of trivia.  Warren Buffet became the world’s richest man by averaging a compounded annual return of 22%.