Life is fraught with risk: Drinking coffee is risky business, and walking out your front door holds hidden dangers. This was demonstrated a few weeks ago when, according to the Washington Post, a man was killed by his coffee mug. Apparently he had stepped out for the morning paper, then tripped and fell. The mug shattered under the weight of his fall, piercing him with a fatal shard. The point of this anecdote is not to raise your safety awareness of the deadly coffee mug, or to highlight the dangers of walking with a beverage. Rather, it is a comically sad illustration of the fact that life is fraught with risk. There is no getting away from it. Life is a game of chance. We take our lives into our hands every day, whether we travel the breadth of oceans or never leave our homes.
Money is no different: Our money is at constant risk as well. For the thousands of years that government and money have co-existed, governments have been stealing from their citizens in the form of inflation. By steadily increasing the supply of money without also increasing the value, all currencies are slowly but surely being debased over time. If you had deposited a large sum into your bank account twenty years ago, then come back and found a large chunk of it gone, you would scream bloody murder. In reality, this is exactly what is happening.
No place risk-free? Money in a mattress is no good; bank accounts are not much better. There is no way to conserve against erosion without making choices, and those choices create risk. Buy a house? The house could burn down, or the real estate market could tank. Invest in your company? If the company fails, you lose your employment and your nest egg at the same time. Buy mutual funds? Pray that the empty mantra of long term works for you, and that you do not face a bear market at the age of 65.
The good news is that risk can be turned into profit. This is why the Chinese character for crisis combines the symbols of danger and opportunity. Capitalism does not work on a first come / first serve basis. It rewards those with the brains, guts and determination to find opportunity where others have overlooked it; to press on and succeed where others have fallen short and failed. Every business person is ultimately involved in the business of assessing risk. In the sense of putting capital to work in the hopes of making it grow, all businesses are the same. The right decisions lead to wealth and success; the wrong ones lead to bankruptcy and a redistribution of resources from weak hands to strong as capitalism rolls on.
Got to risk to achieve: It has been said that the amount of risk we take in life is in direct proportion to how much we want to achieve. If you want to live boldly, then you must make bold moves. If your goals are meager and few, they can be reached easily and with less risk of failure, but with greater risk of dissatisfaction once you have achieved them. One of the saddest figures is the person who burns with desire to live, but, to avoid risk, chooses to embrace fear and lives a half life instead. This person is worse off than someone who tries and fails or someone who never had any desire in the first place. Mediocrity condemns itself.
Blind versus calculated: If you study risk, you find there are two kinds, blind risk and calculated risk. The first, blind risk, is useless and a waste of time. Blind risk is the calling card of laziness, the irrational hope, something for nothing, the cold twist of fate. Blind risk is the pointless gamble, the emotional decision, the sucker play. The man who embraces blind risk demonstrates all the wisdom and intelligence of a drunk stepping into traffic.
However, calculated risk has built fortunes, nations and empires. Calculated risk and bold vision go hand in hand. To use your mind, to see the possibilities, to work things out logically, and then to move forward in strength and confidence is what places man above the animals. Calculated risk lies at the heart of every great achievement and achiever since the dawn of time.
Trend followers take calculated risks every day.
Fantastic View on Calculated Risk
What Calculated Risk Means in Systematic Trading
The distinction between blind and calculated risk is the complete description of the difference between gambling and systematic trend following. Gambling is blind risk: the outcome is determined by probability distributions the gambler cannot influence, the house always has the edge, and the process produces predictable long-run losses for the participant. The lottery ticket is the canonical example of blind risk — the expected value is negative, the process produces the occasional large winner that sustains the narrative, and the long-run result for the average participant is a loss.
Calculated risk in systematic trading is the inverse. The process is defined in advance. The edge is positive by design — the system is built specifically to produce positive expected value across a large number of trades. The position size is calibrated to the risk that the account can sustain through adverse periods. The exit is predefined so that the maximum loss on any single trade is known before the trade is entered. None of this eliminates the uncertainty of individual outcomes. It converts the uncertainty from blind to calculated.
The coffee mug anecdote is the appropriate opening because it illustrates that risk cannot be eliminated from life. The question is not whether to accept risk but whether to accept it blindly or calculatedly. The person who never invests because they are afraid of losing money has not eliminated risk. They have accepted the calculated and certain erosion of inflation as a substitute for the uncertain but manageable risk of systematic investing. That is not risk avoidance. It is the choice of a different and less favorable risk profile.
The redistribution of resources from weak hands to strong as capitalism rolls on is the zero-sum description of markets. The weak hands in this context are participants who take blind risks: who buy on tips, who hold losers hoping for recovery, who exit winners early to lock in gains, who have no defined process. The strong hands are participants who take calculated risks: who have defined systems, defined position sizes, defined exits, and the discipline to follow them. The redistribution is from the former to the latter, continuously and without sentiment.
Frequently Asked Questions
What is the difference between blind risk and calculated risk in trading?
Blind risk is exposure to uncertainty without a defined process for managing outcomes. It includes trading on tips, entering positions without defined exit criteria, and sizing positions based on intuition or confidence rather than account equity and market volatility. Calculated risk is exposure to uncertainty within a defined process that produces positive expected value over a sufficient number of trials, with predefined maximum losses and systematic position sizing. The outcomes of individual trades are uncertain in both cases. The long-run expectation is negative for blind risk and positive for calculated risk.
Why does risk cannot be eliminated from money?
Because all choices involving capital create risk. Cash loses value to inflation. Real estate can fall in value or burn. Equity investments can go to zero. Mutual funds can underperform for extended periods. There is no risk-free option because even the choice not to invest carries the risk of purchasing power erosion. The relevant question is not how to avoid risk but how to select the best risk profile available — which means calculated risk with positive expected value over time rather than blind risk or the passive acceptance of inflation’s certain erosion.
How do trend followers take calculated risks every day?
By entering positions according to defined entry criteria, sizing those positions based on current account equity and market volatility, placing predefined stop losses that define the maximum acceptable loss before entry, and holding positions until the exit criteria are met. Every parameter of the risk is defined before the position is opened. The outcome of any individual trade is uncertain, but the process that produces the outcome is fully specified. That is the definition of calculated risk applied to daily trading decisions.
Trend Following Systems
Want to learn more and start trading trend following systems? Start here.
