Risks

There is a lot of confusion in our minds on the difference between volatility and risk. We often use these words interchangeably and mind you that it can be bad for one's trading performance. You may risk your life's savings in non volatile but risky assets and vice verse.

I am not trying to put up a definition of each of these terms here, but explaining what it broadly means to us.

Volatility is about the broad ranges that a market moves in a given time frame. Risk is the chance of losing every thing one has saved in case of a calamity.

[The idea of finance professionals on risk is: The likelihood of less-than-expected returns. (unpredictability/variance of returns). One great example is cash. Finance professionals will call it risk free, as the return (negative, in inflationalry times) is not very volatile and is

predictable. But it is actually risky as you surely lose value!!]

Thus you could be putting money in junk bonds of a not so great a country and keep getting fixed returns year on year. no volatility! , steady returns and then when you are most relaxed and unprepared, the country becomes bankrupt. All your savings are gone. Thus a not so volatile instrument can be most risky. The worst is the low volatility makes one feel very very safe.

Now imagine another instrument like the stock of a good company. The price moves up and down through out the years making one scared. But over long time it may be less risky and the chances of losing one's all may be actually lesser than the example above.

Thus volatility and risk are not same. One must ensure that the out-of-the-blue chance of losing all should not make you a popper. so your investing and trading strategies must take in to account such probabilities. The way to tackle such lose-all risk is also a mechanism called stop loss. Beyond a certain point it is better to get out of a bad setup and live to fight another day. Most new traders, investors forget this rule to their peril.