Before you begin you trading journey, you must conceptually understand risk. For a technical definition, risk is the amount and the probability of a loss occurring. In order for an individual to profit in the financial markets, he or she must accept risk. A very important realization must be reached before a trader decides to enter the financial markets - a great degree of risk does NOT ensure a great degree of reward. In the capital markets, greater risk does not equal greater reward.

What this practically means is that by pursuing risk, a trader is not guaranteeing reward. In other words, no matter how much leverage you use in your trading account, you may never make any money or profit trading.

An Academic Definition

Before proceeding, a trader is strongly encouraged to gain an academic understanding of risk. In the financial arena, risk is typically quantified as volatility. Volatility in layman's terms is simply how much something moves or bounces around an average. If the trader were to take this definition further, a risky investment could be one which is very volatile, or moves great amounts. The important conclusion from this is that by increasing a trader's leverage, he is in effect increasing his volatility of his investment, or he is increasing the risk he is taking. As we have already learned, increasing risk does not increase reward. In the capital markets, risk can easily be quantified, but reward is typically very difficult, if not impossible to define. Therefore, from a purely academic standpoint, a trader must quantify his risk and how much he is willing to lose or suffer before placing any trade in the markets.