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Thread: Do you know your risk?

  1. #1
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    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!

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  2. #11
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    Thanks for your post.I try to minimize your risk.I learn many thing from your post.Actually risk management is very important thing for a Forex trader.All trader need to learn about risk.I always know about my risk and try to manage it.

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  3. #12
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    It is very much necessary for the traders that they should always be able to assess their risk in such a manner that the profits generated is worth the risk taken. Hence, traders should always very much sure of the risk management which they can take up such that carrying out the trade on long run becomes easy and possible for the traders. Not knowing our risk involved while trading is the biggest risk in the forex trading business.

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  4. #13
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    yes risk management is very important., with this money management you easily survive from your wrong decision. its very important for trader to understand of importance of money management on trading. i always know how much money i will losse, or how much i earn. but if i use the money management. then i know ,, how much time i will be survive from my bad decision.

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  5. #14
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    Pips calculation is very important for our risk management. We trade keeping much pips in our hand so trade will be very good and profitable. But our order should be from correct place. So support and resistance also very important for that.

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  6. #15
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    Quote Originally Posted by Alamgir View Post
    Pips calculation is very important for our risk management. We trade keeping much pips in our hand so trade will be very good and profitable. But our order should be from correct place. So support and resistance also very important for that.
    [lang=id]Yes, pips calculation is very important in here as for our own risk management. But some traders need to know and realize that we just can't keep calculating them if we didn't even know how long we will want to trade. Even the swap rate can kill us as well and we need to add them up into our calculation as for decision making in this business.[/lang]

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  7. #16
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    Quote Originally Posted by Vicko View Post
    [lang=id]Yes, pips calculation is very important in here as for our own risk management. But some traders need to know and realize that we just can't keep calculating them if we didn't even know how long we will want to trade. Even the swap rate can kill us as well and we need to add them up into our calculation as for decision making in this business.[/lang]
    well dear I think every trader have a trading plan and it is simple . because without planing success is not possible so risk as like that ! I mean every trader must be knows about his loss % for every position otherwise total fund can be lost ! but I think 10% or 15% best risk percentage not more. but your position must be on perfect level.

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    Don't loss you hope.

  8. #17
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    Yes, needless to say I know the particular pitfalls that need to be challenged when staying available requests. Every single company must have pitfalls, as well as foreign exchange. Significantly using substantial possibility, the harder the particular benefit that may be earned. Even so, the danger can be confined in the foreign exchange company, using a quit reduction. Therefore, we have to possess beneficial dollars managing.

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  9. #18
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    every trader need to be aware of their risk.i think proper money management is important for avoid huge losses.I am very careful to avoid losses.i am trade two or one and use 10% for loss.we should be aware of single trade.Forex is the risky business so every trader should be knows good money management.

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    Last edited by nusrat; 06-10-2014 at 07:03 AM.

  10. #19
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    Thanks for this amazing post value trader yes sir I know very well about my risk in this market everybody should know that how much risk they are taking in their each trade and how much total risk they are taking of their account for their whole trades in one time risk management is very essential for all

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  11. #20
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    Yes my partner and i learn your risk in OUR trades when i analyse It As outlined by MY OWN trading plan along with the Best risk management.As an trader we believe The idea This can be very essential The item we be required to reduce your risk ALONG WITH increase additional certainty of any trade success.

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