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  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. #3541
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    Quote Originally Posted by Leonvic View Post
    This basic question should be answered unequivocally by any serious Forex trader, your risk can make your account to be increasing as it is meant to be or cause you some bad losses, sometimes, we trade and forget the uncertainty of the market, we could be very concerned with using the risk that can double our account not knowing the dangers we have ultimately subjected our account to, trading Forex without some risk assessment makes whatever we do to be classified into the gambling mode. Reduce risk to improve your profits that is how success comes.
    Of course, I agree that we should be concerned about safety of our account and manage the risks. But if you have experience and knowledge so risk is not 50/50 percent market goes up or down. But risk is about 25 percent and 75 percent are knowledge so ratio will be like 25/75. And here we can try gambling or doubling an account. 3 times everything will be OK and 1 time you can lose an account.

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  3. #3542
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    Quote Originally Posted by Krosneles View Post
    Of course, I agree that we should be concerned about safety of our account and manage the risks. But if you have experience and knowledge so risk is not 50/50 percent market goes up or down. But risk is about 25 percent and 75 percent are knowledge so ratio will be like 25/75. And here we can try gambling or doubling an account. 3 times everything will be OK and 1 time you can lose an account.
    i do not like complex calcuation or complex strategy. we can use simple words and simple strategies. when people think just a complex way can give them profit that wrong thinking can give them just loss. so learn trade but first use demo account for learning. so we can properly earn if we have wait in trading. when we wait we can clearly check market we can get some time to take decision so place when you confirm about market

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  4. #3543
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    Risk is one of the most discussed topics in the forex market but yet you will see people losing their account consistently, the presence of information does not mean people are learned and know how to use it, I am supposed to understand my risks with each trade I want to take, that is just the right thing to do, but when I trade anything and when I am not so cautious with my trading account, I am putting myself in harm's way, my money could be lost, risk management means discipline, each trader need to have this at the back of their minds.

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  5. #3544
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    For sure, a lot of learning has made me to come to conclusion and then got me know the risk I will be facing when trading. All business has got risks but then I think forex trading own is even more better, because the risks is what we can manage and also get to control as we trade. There are risks in all businesses, but the good thing about forex is that, the risks can be controlled if only we can control our emotions.

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  6. #3545
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    Quote Originally Posted by Striker$ View Post
    For sure, a lot of learning has made me to come to conclusion and then got me know the risk I will be facing when trading. All business has got risks but then I think forex trading own is even more better, because the risks is what we can manage and also get to control as we trade. There are risks in all businesses, but the good thing about forex is that, the risks can be controlled if only we can control our emotions.
    yes if we have emotions we have control on it also,so make sure you have control her and for this we can really make good orders, from my experience we can place right order if we have experience and have some patience, if we do not have patience we can not survive for long, so place order and learn as much as you can, with it your personal behavior also matter

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  7. #3546
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    I know and understand my risks and I know that we should make good decisions to ensure that we are not taking huge risks, one of the decisions is that we always get to make use of the stoploss and the 2 percent risk rules when we are trading. It is an important decisions. Although, greed and fear will be there to fight us, but if we can stick to the simple rules of using little risks, we will be profitable.

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  8. #3547
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    Quote Originally Posted by naeem555 View Post
    yes if we have emotions we have control on it also,so make sure you have control her and for this we can really make good orders, from my experience we can place right order if we have experience and have some patience, if we do not have patience we can not survive for long, so place order and learn as much as you can, with it your personal behavior also matter
    The traders with emotion have to forget that they can make success in the market. Traders will only make success when they are doing all the necessary things that can command success to them. The trading of the market is risky, we should know that, and we have to learn all the means that will help us to plan for it in such a way that we will be earning consistently and likewise be surviving in the market.

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  9. #3548
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    A trader with a bad risk control will need to get the experience so they can control the trade fluently with less mistake possible. We should not take risks blindly but to avoid big losses we should calculate the risks properly while trading. Without knowledge, we will not know the risks in trading and without discipline, we cannot manage these risks well, so be careful to avoid the terrible situation.

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  10. #3549
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    Any one who doesn't know their risk is actually going to make a big mistake. Risk is general in the business and you should understand really well that knowing your risks means that you should be able to put it to work, a lot of traders knows their risks and then they are not making the right move to ensure that the implement it while trading.

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