What is the difference between practical risk and theoretical risk?
Posted by Charlie Trader on 30 March 2018 04:39 PM

The below example will illustrate the difference between practical and theoretical risk.

Say you buy 10 stocks at $15.00. THEORETICALLY, the stock price can go to zero tomorrow and you can lose all the money you have invested in this stock, which is $150. Therefore, your THEORETICAL risk is $150.

However, with the way we trade, having a stock price collapsing to zero overnight is highly unlikely to happen and we always have a stop loss in place. Say your stop loss is at $14, i.e. you will sell the stocks at a loss of $1 per share if the stock price turns against you after your trade is triggered. If this happens, you will lose a total of $10 on the trade. This $10 risk is your PRACTICAL risk as, if you are in a losing trade, this is the more likely scenario than the stock price gapping to zero.

Comments (0)
Post a new comment
Full Name: