Do you know your risk?
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  1. #1

    Do you know your risk?

    Hi, traders!

    Many things were discussed about risk, yet I observe very frequently that traders don’t understand risks associated with trading. So, I’ve decided to write this article which is highly recommended for reading for beginner traders.
    First major fallacy about risk sounds like this: «risk for my position is equal to size of possible loss for my positions, therefore it is known and can be easily calculated»

    In reality, risk is not just size of your loss in case you are stopped out from your position, but also possibility (probability) of this event. I was reflecting on this point in article «Frequency and magnitude»

    Second major fallacy about risk sounds like this: «Risk can be eliminated though good analysis». Here, on the forum, you may see a lot of posts confirming this fallacy. In reality. Think about this point: your analysis is based (everybody’s analysis) on incomplete and conflicting information. As most of us are retail traders employing chart analysis, we see only price, we don’t have access to real information about liquidity, large orders, real volume. But marketplace is so huge and uncertain that even largest players can’t move the market in the long term perspective. Bank of Japan, which was intervening the market too often, was only able to create pullback, and rarely a reversal. Direct interventions with large orders were not successful, however they were able to reverse a trend through monetary policy (creating conditions for reversal, but not fighting the market itself).
    Let’s categorize types of risks that trader faces with in trading.

    1. Risk of uncertainty.

    That’s risk number 1 in trading. Traders with several decades of experience say that “We might think we know but in reality we don’t know”. Before making forecasts and claims about the market, don’t forget to add magic words «I think». «I think I know what’s going on», «I think that price will reach this level…» e t.c.
    It’s impossible to eliminate this risk completely. We do some analysis, but every analytical view will help us to shift probability in our favor, not predict. With analysis we increase our odds of success. If you accept that you have highly uncertain situation in each trade, you will never go «all in», employing 100% of your leverage. Actually, 50:1 is also high leverage, statistically you will blow up your account with this leverage. Odds are too low that will be able to trade perfectly and survive. 10:1 is better, in this case will have the chance to survive. That’s statistics.

    2. Risk of counterparty.

    Also, this risk is under your control. Many brokers can cancel your trades, execute them with wrong prices, and eventually refuse to pay you your profit. Forex brokers are not really in the business of matching trades between market participants, they rather act as market makers and carefully hedge their overall position. It’s important to choose brokers with reliable technology of hedging and transparent liquidity providers. Roboforex, for instance, has Currenex as major liquidity provider, using streaming prices from CMS. Know more here

    3. Risk of not knowing your trading instrument.

    You might be surprised that traders often are not completely aware of trading conditions for instruments they trade. For example, traders can open multiple positions, creating huge overall position (though, hedged). Of course, they will be charged for swaps. «Charged for… what?»
    Traders often don’t know what news and economic releases affect prices of assets their trade. If you were day trading on EURUSD previous Thursday (June 5) and was not aware of the fact, that market was expecting claim of interest rate, you could be surprised and not always with unexpected profit (rather with unexpected loss).

    4. Risk of complexity.

    The more complex your trading is, the more hidden risks you have. Let’s say, you employ 2-3 trading instruments with different trading systems on each of them, in this case complexity of your trading is increased and you might expose yourself to nonlinear cascading effects.
    Experienced traders do not optimize parameters of their indicators. Why? Is seem to be very obvious and useful thing to optimize your system. But in reality if you optimize your system so that your system generates income much greater than average and underperforms in other markets at the same time, you start accepting additional risks that market conditions (volatility, market structure) will change and bring your more losses than you were expecting.

    5. Risk of not knowing your risk.

    And last but not least – you might even be unaware that you have some risks. Your internet connection maybe unstable, your chart maybe inaccurate, your trading software may crash, your stop-loss maybe not executed (though you thought that it was) and other and other.
    Like Nassim Taleb had said – «we prepare to fight against terrorism, but can be harmed from diabetes»

    Good luck and accept your risks!

  2. #2
    Yes i know the risk on my trades i analyse it according to my trading plan and the best risk management.As a good trader i believe that it is very necessary that we have to reduce the risk and increase more certainty of the trade success.

  3. #3
    Yes, of course I know the risks that must be faced when being open orders. Every business must have risks, including forex. Increasingly using large risk, the greater the profit that can be generated. However, the risk can be limited in the forex business, using a stop loss. Therefore, we must have good money management.

  4. #4
    I think every new trader in forex market should first know that forex market is the most risky business in the internet but also it is the most profitable business in the same time.When anyone invest in anything more risk that is mean it is more profitable.if we look for any business is less risk we will not find it as profitable as forex market.The best thing in forex market that they are some tools can help us to control loose like learning and never trade without stop loose and have very strict money management

  5. #5
    Join Date
    Oct 2013
    every i trade, i calculate for the risk or the worst situation. it is necessary then i can complete it next time. i set the percentages of risk and also reward. and always try to keep me at the safest place for trading forex, but sometimes the emotion trigger me to do something careless and take uncertain risk , so this is still my problem for me

  6. #6
    Join Date
    Aug 2013
    Thanks value trader for your nice and interesting post about risk. I didn't think about all these risk I am carrying when trading. Probably that is why I have blown my account so many times. I just think, Forex is itself very risky why we trader take extra risk to make our account unstable. It is better to move slow, start with basics and very small lot. Try to understand the market as much as possible though it is very much impossible to understand it fully. And give your trade enough room so that you can make something out of it.

  7. #7
    Quote Originally Posted by vipuldevkar View Post
    Yes i know the risk on my trades i analyse it according to my trading plan and the best risk management.As a good trader i believe that it is very necessary that we have to reduce the risk and increase more certainty of the trade success.
    i also know my is risky business and risk management is very is tough is not easy to survive without proper plan.we should have best risk management plans in order to survive in forex market.
    I always trade in limits .in any situation i do not take big risk.i trade in low risk and because of this reason i can survive in all situations.

  8. #8
    The risk management system is different from traders to traders. Every traders have it own risk management strategy which is different from other traders. I am using risk upto 10% and with the help of it i get much money every month but a new trader should try to take 1 to 2% risk in trade.

  9. #9
    yeah I apperceive the risks that charge be faced back actuality accessible orders. Every business has risk, including forex and all other.the beyond the accident the bigger the accumulation . However, the accident could be bound in the forex application a stop loss. Therefore, we charge accept acceptable money management.we should b actual carefull afore we booty any step.

  10. #10
    Registered user mohabbat's Avatar
    Join Date
    Jun 2013
    Trading acount
    yes dear I am always know my risk , so I am very careful to that because I do not love any loss so always I want to avoid it, but some time my position take stop loss but it is simple thing because I use 10% for loss but I am trade one by one. but as a trader always we need to careful.
    Don't loss you hope.

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