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
    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 risk.forex is risky business and risk management is very important.forex is tough field.it 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.

  4. #4
    in forex trading we have prepared for the risk, because in the trade risk there is always, not all traders have a profit with continuous, certainly never experienced losses in the trade, but in forex trading we can minimize risk of it by making analysis as well as the risk management, one of them with the use of stop losses in order to avoid risk

  5. #5
    risk there is always in the trading business and as a trader must be prepared for the risk that, the most important how to be able to avoid risk in the trade then for it all necessary risk management in the trade, it should be the expense of capital to be used as prevention of the very large losses, may be able to 20% or 30% risk management made

  6. #6
    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.
    Yes , Friend, I also believe that, Trading means risky, so, as Risky business should money management follow up and hard trading plan than can be give good profit in this market. We are reduce our loss , if correctly maintain trading tips and mm rules in live trading account.

  7. #7
    Registered user Quid's Avatar
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    Quote Originally Posted by High View Post
    Yes , Friend, I also believe that, Trading means risky, so, as Risky business should money management follow up and hard trading plan than can be give good profit in this market. We are reduce our loss , if correctly maintain trading tips and mm rules in live trading account.
    The market is risky whenever you talk about the potential of having great loss from bad money management and wrong trading strategy in forex market,so the traders should know the risk increasing whenever they are not concerning about the risk itself,they are not knowing how to control the risk and when the risk could be increased by trading high lot size.
    Finally successful traders

  8. #8
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    Quote Originally Posted by High View Post
    Yes , Friend, I also believe that, Trading means risky, so, as Risky business should money management follow up and hard trading plan than can be give good profit in this market. We are reduce our loss , if correctly maintain trading tips and mm rules in live trading account.
    Yes, you should know your own risk. There are so many risk the traders will encounter in the forex market, that is why you should reduce the trading risk you are taking per time. Also, the market is risky altogether, it is very important that traders look for better management to get the risk used to his advantage.

  9. #9
    comparison of the risk of loss should be smaller than the target profit, as likened the transaction to perform the installation of stop loss and take fropit, put a stop loss should be larger than the opening position and take fropit store it in a shorter distance

  10. #10
    Registered user
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    yea i know about the risk. when i join forex then i assure about forex business and it's profit and loss. here need not only knowledge but also experience. we all should trade in demo account at first time and we can avoid our trading loss by demo account.

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