Trading with Charts for Absolute Return

THE ROLE OF RISK IN COMMODITY AND STOCK MARKETS

Even the most widely accepted and most complicated methods of forecasting and the best available sources of information do not guarantee a correct prognosis of price movements in any product analyzed. Qualified prognosis methods can help reduce investment risk but will never completely eliminate it. Risk is therefore an important factor that must be taken into account when choosing an investment strategy.

The Concept of Risk

The concept of risk tends to create quite a bit of confusion. For example, there is no principal risk with treasury bills, for which the rate of return is guaranteed for the length of maturity unless the nation declares bankruptcy. The investor will receive the specified rate of interest until the final maturity date. Quite often, however, the investor is not satisfied with the return from government issues. An alternative, then, is to invest in stocks or commodities.

For decades, investing in a combination of government bonds and stocks worked very well, because the stock markets went up with very little drawdown. Returns on investments of more than 6 percent annually were easy to achieve. But those times are gone.

Methods of Estimating Risk

With the help of more powerful computers, the methods of estimating risk became more sophisticated over the years. Investors who want above-average returns must be willing to take above-average risk. In order to choose rationally among various investment alternatives, investors ...