Most refer to the inherent risk in trading as something they "take". But that's looking at risk in a negative sense.

You might want to really consider what I have to say about this, as the difference in your mindset could mean making money, or losing money.

Of note is that to this post, I have a companion video of the same title: Difference In Taking Risk vs Assuming Risk that puts all of this together from a different view point.

If you've come from watching that video, then press on here. However, if this is your starting point, I might suggest that you read through this before watching the video. Or, if you want, you can skip to the bottom of this post to watch that video now.

Though the words 'take' and 'assume' might appear to mean the same thing, they really do define different things.

Taking Risk vs Assuming Risk

The immediate, and simple difference is that 'taking' a risk is gambling, whereas 'assuming' a risk is still taking that risk, but with caution and preparations in place to mitigate the risk itself as well as a plan to extract yourself from the situation if the risk manifests itself beyond your predetermined level of tolerance.

As an example, you 'take' a risk crossing the street by jumping off the curb between parked cars, whereas you 'assume' the risk of crossing the street by doing so at the corner crosswalk after the light has changed, and the cars have all stopped. I could list a few more examples, but you get it.

The obvious answer is that to assume the risk you must study, understand the market, understand price action and all of the associated tools available to analyze that price action, and understand your own psychological and emotional makeup so you can match that up with the style of trading you'll do, whereas taking risk implies not doing any of that.

But that's just the first step in the assumption of risk process; sort of like setting the stage before the actors walk on.

Primary to better understanding risk is to recognize that no matter what you do to mitigate a risk, the risk is still there. Mitigating the risk does not reduce the risk, it reduces your level of risk.

A simple example would be you execute a long trade, but you don't enter a stop loss. You'd be taking a risk. You mitigate that risk by setting a stop at 15 pips below your entry point. You haven't eliminated the risk; you've mitigated it and assumed the consequences of price reacting 15 pips. You've 'assumed' the risk.

Your trading plan should have very specific rules, and guidelines for the application of progressive risk management throughout the trade entry and management process.

This can become a quite complicated exercise if you're not clear in your own mind as to what your own risk tolerance is, and how you intend to structure those trade risk rules to be compatible with that tolerance level.

For example, if you're a scalper on the 1 minute time frame chart, you would not be effective in establishing a 15 pip stop level, regardless of if all of your structural and technical analysis indicates that to be a 'sound' level. You're trading as a scalper because that suits your psychological makeup, but using such a huge stop is obviously crazy when you're in there 20 times a session grabbing 3 or 4 pips at a crack.

Similarly, if your personality is more suited to trading up on the daily time frame where the ATR may be 100 pips, that 15 pip stop that might be fine on a 15 minute chart will not be practical on the daily.

I hope all of that goes to show not how complex all of this can be, but how critical it is to understand the methodologies of risk assumption.

It's so vital to recognize that these methodologies of risk assumption are critical to not only the mechanics of trading, but also of your own psychological makeup. Failure to understand this stuff before you begin trading forces you to be a risk taker, not a trader who appreciates the assumption of risk.

1. Trade Entry
2. Early Active Position Price Reversal
3. Late Active Position Price Reversal
4. Post Profit Target Price Action

Besides just setting an initial stop loss at trade entry, you have to consider the risk of just taking the trade based on whatever analysis process you use to evaluate entry criteria. Things like current price action, past and near structure points, indicator flags, patterns, and a whole host of other factors need to be evaluated with risk in mind before even getting to the point of postulating a trade entry point.

Once the trade is made you may want to have risk mitigation rules even prior to stop loss consideration. For example, if you are a longer term trader are there any risk mitigation rules that you might want to apply early in the trade before price reacts to the stop?

Correspondingly, once you have a mature position that is moving toward your profit target, are there any risk mitigation rules you might want to apply? For example, this might be something as simple as applying a trailing stop.

And what rules for risk mitigation could you think of that you might want to employ for a position that has progressed beyond the profit target? Would you want to stage more lots into the position as price moves in your favor? If so, you have the concern that each additional staged-in lot changes the overall position average. Is that something that might need special risk mitigation rules?

And you do need to write your risk mitigation rules into your trading plan.

Writing them down into your plan creates a sense of accountability: you wrote them in there so if you don't follow those rules then either the rules aren't any good — in which case you have to change them — or you just really don't give a shit about being a good trader, and only want to hit bid/ask for the thrill of it all because some fool told you how easy it was.

Well, look: it is easy. But it's only easy if you do some simple, up-front work to properly set the stage for you. Then, when you walk on with an order ticket in hand, it'll end up being a good trade because you followed your rules.

Video: Difference In Taking Risk vs Assuming Risk