Why No One Talks About Affordable Economic Losses Anymore
Innovation and Entrepreneurship premises on the affordable economic loss principle.
The mindset has been trained for an iterative process of affordable economic losses.
PRINCIPLE: AFFORDABLE LOSS
You can minimize the risk of a project by only investing what you are willing to lose – rather than focusing on what can be achieved if the project succeeds. You should, therefore, practice how to make decisions and perform actions where you can manage the potential loss if your actions do not get the expected outcome. According to the effectuation logic, you can maintain control by taking small steps in one direction instead of working towards long-term goals with unpredictable outcomes. By approaching decision making this way you can avoid investing time or money that you are not actually willing to lose.
Now trading is a different ball game altogether. Nevertheless, it can be applied in stock trading with a little tweak here and there.
Let’s say you are a stock trader who takes up trades with risk to reward ratio of 1:2 to 1:4.
And every trade you deploy 10% of your capital as stop loss or risk.
With this scenario with a success ratio of only 20% will lead you nowhere.
Since you have managed your risk but not the one that is economically affordable to you.
I had mentioned this is my last workshop and they started arguing with me. Mathematically they showed me the calculations that they will never lose money in this process.
I did not argue since I knew they were right.
But the point here is you do not Earn Money.
This is not the ground rule. But the probability of earning money is extremely low.
There are two legs of trading Risk and Return.
We are left with one option either one should reduce the amount of risk to an even lesser portion of capital like say 2% of your entire capital.
On the other hand and the one which I prefer is to increase the reward. From 1:2 and 1:4 to 1:8 and 1:10 this seems to be a very difficult and a rare opportunity.
But it is definitely worth the wait.
How Affordable Economic Losses Could Help You Win the Trading Game
When the opportunity comes occasionally the tendency to make wrong trades reduces.
In this entire process, you are you can maintaining control by taking small steps in one direction instead of working towards long-term goals with unpredictable outcomes.
The reason is now you are looking for big opportunities and moves. You are not worried about small moves or smaller profits. In this process, you never lose on a larger picture.
Ever sat down and figured out a formal statement of your trading activity, whether individually or as a team.
What is the most interesting thing you learned?. I’d love to hear from you in the comment section.
That’s all you need to get started to a profitable journey of your trading career. you’ll learn the power of economic affordable losses with you new trading activities, and draw inspiration and lessons from your trade.
But for now, just get started.