Trading is about risk.

It is about rolling the dice – in a calculated way – for a potential payoff.

The risk in trading should not be taken blindly. The risk should be measured at controlled.

“If X happens – my loss will be A.”
“If Y happens – my gain will be B.”
“And both are risks that I am willing to take.”

The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.

-Ed Seykota, quoted in Market Wizards, By: Jack Schwager (Amazon)

Risk management is so important in successful trading, that if risks are managed, many other things can be ignored.

For instance, I trade cattle.  And do you know how much I know about cattle in general and the cattle market in particular?

I know cattle are stupid. I know branding cattle is no fun. And I know a cattle round-up in July outside of Del Rio, TX is hot and dusty.

I know cattle are good with A-1 steak sauce.

But none of that needs to stop me from trading cattle in a profitable way.

Because managing losses is key.

And letting go of losers is part of that.

Remember the expected value of a trade – or. more specifically, a large number of trades – is more important than the information behind a trade.

“I will give you an example how important this advice is. One of the world’s largest coffee traders invited me to his house in London. When I walked into his library, I noticed he had just about every book ever written on power. He took me to one of the finest restaurants I have ever been at. At dinner, he asked me, “Larry, how can you know more about coffee than me? I am the largest trader in the world. I know where the boats are; I know the ministers.” “You are right,” I answered, “I don’t know anything about coffee. In fact, I don’t even drink it.” “How do you trade it then?” he asked. I told him, “I just look at the risk.” Well this great meal lasted for several hours. Five times he asked me what I did, and five times I told him that I managed the risk. Three months later I heard that he had blown $ 100 million in the coffee market. He obviously didn’t get the message. And you want to know something? He does know more about coffee than I do. But the point is, he didn’t look at the risk.”

-Larry Hite, quoted in Market Wizards, By: Jack Schwager (Amazon)