Risk is what you don't know you don't know
I don't know you said it but it still remains a very interesting term especially for those that trying to trade crypto where there are highly volatile and risky assets that can make you a millionaire out of nowhere or bankrupt you in minutes.
In most of our daily life and when trading we are trying to make plans and predictions and trying to see the whole board of different kind of risks that can occur that might affect either our lives or our our trading plan , think for a minute how many scenarios does our mind process when trying to plan a trade? But at the end of the day we cannot predict everything . And the following chart an make it even clearer
| Consider the example of investing in treasury notes vs. an upcoming small-cap. With treasury notes, you are assured a return of 3 to 4% at the end of the year. There is only one highly unlikely scenario of a U.S. default where you would not end up getting the payout.
Compare this to the small-cap where the range of outcomes is much higher. The company can go out of business where you have to mark your investment as a total loss or the company can double its stock price in a year giving you a windfall. |
And that logic gives us that chart
source
But let us also read what a famous risk management thinker wrote about risk.
- Known Knowns: These are risks or facts that you are aware of and understand. You can plan for and manage these risks because you have knowledge about them.
- Known Unknowns: These are risks or uncertainties that you are aware of but do not have complete information about. You can work to gather more information and reduce uncertainty.
- Unknown Unknowns: These are the risks or surprises that you don't even know exist. They are the most challenging to manage because you have no prior knowledge or awareness of them.
So in order to manage our risk is to always be prepared to face thinks that we are not prepared to.
In trading that means to never trade with all our capital always set our stop loss and always have additional capital and of course to always make our due diligence because the 90% of the projects involved in crypto won't succeed .