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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. #3681
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    Yes my dear everyone know about his risk of loss on every trade before open it. But, itself and other problem that we are avoid mistakes which become the cause of our loss and we will face continue loss in forex market. I can say with 100% sure that no one can become successful without following the rule of money management and know about his risk.

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  3. #3682
    Trader mexima's Avatar
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    Quote Originally Posted by letsdo View Post
    Yes my dear everyone know about his risk of loss on every trade before open it. But, itself and other problem that we are avoid mistakes which become the cause of our loss and we will face continue loss in forex market. I can say with 100% sure that no one can become successful without following the rule of money management and know about his risk.
    well you are talking about the rule of taking risk but to know the actual amount of risk you have taken to calculate the number of pip which you have putted in the sl . the amount of sl will be minus from the capital will be risk ratio : for example if you put the sl of 10$ from 100$ capital which means you have taken 10% risk of your account.

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  4. #3683
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    I know my risks in such a way that I know that every taken trades will not possibly move to profits, so therefore I know that some times, I get to loss, therefore it is better to have a portion of risk per trades, so that when you loss your money, you still get to be able to have some money left so as to recover. Although, forex tends to get to our emotions, making it hard for us to control our emotions.

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  5. #3684
    Trader Silhouette's Avatar
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    Quote Originally Posted by Striker$ View Post
    I know my risks in such a way that I know that every taken trades will not possibly move to profits, so therefore I know that some times, I get to loss, therefore it is better to have a portion of risk per trades, so that when you loss your money, you still get to be able to have some money left so as to recover. Although, forex tends to get to our emotions, making it hard for us to control our emotions.
    As long as we use our analysis to trade and our ideas are reasonable, believe in good confidence that our trades will be closed in take profit no stop loss. Understanding the risk means we must accept the consequences whenever market moves against our trades. We must let our trades off in stop loss so we don't keep them much longer for more losses. Loss must be limited at any cost because we must learn from that and able to manage our risk better than before.

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    rules made to be followed, not to be broken

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