Banjo Smyth

Does the idea of a high risk high reward investment strategy excite you or make you scared?  It is the general perception amongst most people that in order to make spectacular gains you must take spectacular risks.  This is definitely a myth as there are plenty of investment strategies that allow you to make massive profits with very little risk.  Today I would like to have a look at some of the emotional and decision making processes that take place when using high risk high reward investment strategies.

Am I saying that high risk investment strategies are bad?  No definitely not, high risk strategies have a time and place but they must be one of many strategies that you use - not your main investment strategy.  I would also like to mention that there are plenty of ways to make high rewards without necessarily taking high risks.

If your broker suggested that you have a look at a particular trade that required $1000 that would double to $2000 if it was successful or you would loose half ($500) if it was unsuccessful - what would you do?

In my experience most people are pretty happy to accept the challenge and take a small risk for the prospect of a very good profit.

Would your decision change if your broker offered you the same trade but instead of $1000 you had to put $100,000 o the line.  So if successful your profit would be $100,000 or your loss would be $50,000.

Suddenly most people aren’t too keen to take on the trade - Even thought the odds are EXACTLY the same.  Obviously the prospect of loosing $500 is much less frightening than losing $50,000 but I believe that it shouldn’t make any difference to your decision making process.  A high risk high reward investment strategy is exactly that - an investment strategy that that has the potential to loose or win you a lot of money.  I prefer to look at all investment strategies as a percentage rather than in dollar terms.

This has two main benefits that are vital to developing a strong mindset that is vital when trading (especially if you are using high risk high reward strategies).

1.  It makes you look at the trade in relation to the actual value of the trade.  The above example is the exact reason why this is beneficial.  Should you place a trade that has the ability gain a profit of $100,000 or a loss of $50,000?  There is no right or wrong answer but if you start looking at the percentages of the trade you will be able to make a much clearer decision.  Always make sure the numbers stack up no matter how big or small the trade is and especially when you are using high risk high reward investment strategies.

2.  The best thing about looking at your trades in terms of a percentage is that it stops you from getting to emotionally attached to the profits and losses that you will inevitable have.  For instance if you were to make a $5,000 profit on one particular trade it is very easy to start getting ahead of yourself and spending the money on flights around the world, cars, boats etc.  If you keep focused on the Percentages you can be extremely happy with your trade but not get to over the top.

Using percentages is even more important when you have a loss on the stock market.  When you lose money is very easy to start thinking about how many hours of ‘normal’ work you have just lost and very quickly you are so depressed that you never want to trade again.  It is quite common for new traders to want to quit after their first loss on the market - even if they have still made a profit over all!  Using percentages gets you away from this mindset and makes you analyze your profits and gains in a much less emotional state.

So does this mean that high risk high reward investment strategies are a thing of the past?  No, it just means that you should really think about the pro’s and con’s of every investment that you make.  One of the main reasons why people love using high risk high rewards investment strategies is because they love the feeling of taking risks.  You only need to go to the casino to see that many people are addicted to the rush of gambling with their money.  The question you need to ask yourself when you are placing a trade is - are you Gambling or are you Trading?

When you are investing on the Stock Market it can be a fine line between trading and gambling.  If anybody knew exactly what the Stock Market was going to do they would make millions of dollars everyday but not even Warren Buffet knows EXACTLY which way the market will go every time.

So how can we decipher between Stock Market Gamblers and Traders? Or do you think there simply isn’t any difference? I would like to look at one basic investment strategy that I believe is the main difference between Stock market traders and stock market gamblers.

Basic Investment Strategies – RULE No.1

‘You must know when you are going to get OUT of a trade BEFORE you get INTO the trade, no matter what happens to the stock eg. It goes UP, DOWN or SIDEWAYS.’

I believe that this basic investment strategy is the main difference between Stock Market Gamblers and Traders.

Why is this rule so important? Investing is about having a great plan or basic investment strategy and sticking to it. The last thing you need is to let your emotions take control of your investing. As soon as you let your emotions get involved you are beginning to gamble with your money. It is vital that you create a set of rules that you will follow no matter what happens.

If you are confused by the idea of knowing when to get out before you get in then I will quickly explain what I mean by this. When you enter a trade you should be aware of every possible outcome eg. The share price will rise, fall, move sideways or a combination of all of these. You need to know exactly what you are going no matter which direction the stock ends up going. This is an incredibly basic Investment strategy but you would be surprised at how many people enter into the market with no idea of what they are trying to do. This is my definition of a Stock Market Gambler.

So my advice is to start creating some rules that will become the basis of your perfect investment strategy. Once you have created the rules you should plot out a plan that you can follow and then most importantly you need to stick to the plan. Best of luck and happy investing.

Just letting everyone know about the exciting new ‘Investment Strategies For The Stock Market’ tutorials that are going to be posted right here at BanjoSmyth.com.  These Stock Market Tutorials will teach you simple and easy to use strategies that you can use on any Stock Exchange. The topics will include:

- Basic Investment Strategies

- Investment Strategies Using Options

- Investment Strategies Using CFD’s

- Investment Strategies - Technical Analysis

- Investment Strategies - Fundamental Analysis

- What Your Broker Doesn’t Want you to know

- The Psychology of Trading

plus many more.

I believe that too often Investment Strategies for the Stock Market are hidden from the general public, instead only known by a select few. This means that the general public are forced to simply follow their financial advisers advice and you will soon find out this is not always a good thing. I hope you enjoy the ‘Investment Strategies For The Stock Market’ tutorials and use them to increase your financial education.

Cheers and Happy Investing

Banjo Smyth