“Risk is the Possibility of Loss”


“Risk is the possibility of loss. That is, if we own some stock, and there is a possibility of a price decline, we are at risk. The stock is not the risk, nor is the loss the risk. The possibility of loss is the risk. As long as we own the stock, we are at risk. The only way to control the risk is to buy or sell stock. In the matter of owning stocks, and aiming for profit, risk is fundamentally unavoidable and the best we can do is to manage the risk. To manage is to direct and control. Risk management is to direct and control the possibility of loss. The activities of a risk manager are to measure risk and to increase and decrease risk by buying and selling stock.”


Source: Ed Seykota

5 thoughts on ““Risk is the Possibility of Loss”

  1. Simple but counter-intuitive.

    It requires a continuously open mind which reserves judgment until the evidence is weighed.

  2. We can have close approximations of price action at any given moment in time but no one can start with anything precise, no one. Precision is something we attain as we go along. So, we have to manage the possibility of loss as we go along.

  3. I continuously tell people who ask me about trading that I buy when it goes up, sell when it goes down and go to the beach when it’s sideways. They always say, “How do you know when it’s doing what?”

    I believe Seykota says in Michael’s book that if you want to see a trend stand far away from the chart.

    So true…it makes the trend really obvious, even without math and indicators.

  4. You don’t need to find any deep meaning in what’s being said here. There is no “price action precision”, there are no “approximations”, there is only your tested, profitable plan that includes risk management and the discipline to stick to it (making the necessary buy and sell decisions according to your system).

    If you’re in the market, you’re at risk. That risk could be immediate loss of your capital, or it could be the loss of open equity on a profitable trade. As long as you have prepared a reasonable risk management plan you have nothing to fear.

    This is why Seykota is my favorite trader of all-time… he is blunt and speaks in simple terms, but most people looking for “answers” seem to feel the need to extrapolate what he says like it’s some big mystery.

  5. @Trader Jim
    1) We all start with an imperfect measure called “trend”, which is merely an “approximation” of past experience.
    2) There are plenty of simple systems that work but few people able to follow them. So the real problem for trend followers(or any trader) has to do with sticking to the plan. So, simplistic advice such as just follow the plan do not hold.
    3) Unfortunately, you can not warm trust out of your system. Trust starts with the person. Trust in trends or in an approach does not come from endless system testing and logical mental abstractions it comes only when you’re able to verify your observations through direct sensory experience.
    4) Some of us look to direct experience to answer our own questions. Some people like Mr. Ed can serve as good guides.

Comments are closed.