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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. #3671
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    Quote Originally Posted by cutiekc View Post
    I know my risks, life it'self is also a risk and the best thing is for us to know how to go about it, which means, we knowing our trading strategy first, once we have learned about our trading strategy, to reduce the risk of losing our money, I will suggest that we get to only focus on the trading signals which has more of higher probability winning trades.
    There is risk everywhere and even in life and therefore even to live a good life we need to be working hard and smart. Those who know their risks and those who dont violate their trading limits will have a strong hold on trading and surviving in Forex. But to keep up with the right ways of trading and to avoid getting repulsive during trading, we need a very strong mindset.

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  3. #3672
    Registered user sniper007's Avatar
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    I know my risks, you should take time to understand the market first. Because forex trading also gets to fuel our emotions, so therefore making us to make emotions decisions, so when we know how to trade and make decisions not with emotions, then we can manage the risk effectively. Risk management is also there to help us, when we have also been able to admit we need it.

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  4. #3673
    Registered user Toyen's Avatar
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    Quote Originally Posted by sniper007 View Post
    I know my risks, you should take time to understand the market first. Because forex trading also gets to fuel our emotions, so therefore making us to make emotions decisions, so when we know how to trade and make decisions not with emotions, then we can manage the risk effectively. Risk management is also there to help us, when we have also been able to admit we need it.
    It is good for you to know your risk, likewise myself, every time i want to trade the market, i make sure that i know the risk i am going for, so that i will trade well. The market is not what is easy to be traded, and the traders with the best practices will need to be cautioning themselves about the risk they are taking. Not that traders will rely on the power of their trading strategies alone.

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  5. #3674
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    Quote Originally Posted by Toyen View Post
    It is good for you to know your risk, likewise myself, every time i want to trade the market, i make sure that i know the risk i am going for, so that i will trade well. The market is not what is easy to be traded, and the traders with the best practices will need to be cautioning themselves about the risk they are taking. Not that traders will rely on the power of their trading strategies alone.
    market is not easy for trading but here we need to know about success, actually market is not easy but we want to earn big is there any other business where we can earn big? so its not if here we have chance to earn big then we should do some hard work, risk controlling and management is core thing so never try to avoid them must use them and work on them

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  6. #3675
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    Quote Originally Posted by naeem555 View Post
    market is not easy for trading but here we need to know about success, actually market is not easy but we want to earn big is there any other business where we can earn big? so its not if here we have chance to earn big then we should do some hard work, risk controlling and management is core thing so never try to avoid them must use them and work on them
    Market is not easy but then there is no easy money in the world, so we have to build our capability no matter which business we are into. There can be fast losses easily in trading because for losing we dont need any skills but for earning we need lot of analytical skills and strict risk management. Stop loss is meant to manage or limit the losses and for profits we need to be able to strike high probability trades using a strong strategy.

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  7. #3676
    Registered user layigold's Avatar
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    Trading forex on margin carries substantial amount of risks which is capable of wiping your trading account just by a single bad trade if the the risks of trading are not well and properly managed . Those who find fulfillment in trading through forex brokers are those traders who really have good understanding of the riskand who at the same time are ready to do every thing possible to carefully manage the risks of trading to their own advantage. That is the only way to survive hard and difficult times that can not but come in forex trading .

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  8. #3677
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    Your risk in this business is something you must have good idea about and plan on how you could manage such system for an effective trade. Knowing your risk is an excellent one and its likely to give us a great chance to work better on this trade. The risk we face here is huge and the point here should be we create a good system that will go as far as helping us to deal with risk. I do make sure I learn from my risk and build a way that will determine great management. Risk is part of trading but can be duly managed.

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  9. #3678
    Registered user Azis Muslim's Avatar
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    Quote Originally Posted by layigold View Post
    Trading forex on margin carries substantial amount of risks which is capable of wiping your trading account just by a single bad trade if the the risks of trading are not well and properly managed . Those who find fulfillment in trading through forex brokers are those traders who really have good understanding of the riskand who at the same time are ready to do every thing possible to carefully manage the risks of trading to their own advantage. That is the only way to survive hard and difficult times that can not but come in forex trading .
    We are aware of that and of course we do not use our whole deposit as our one single margin trading, it is obvious. No need to explain how bad beginners are doing it because it is pretty normal to them due to lack of knowledge and they do not have any idea how to control their risk in trading. For most of us here who already been in years, it is no longer a serious issue to handle and everything is controlled according to our own plan.

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    For sure I do know my risks and all that and also, I try as much as I can to take it seriously. Knowing that the forex trading market is so much complex, I stick to two percent risks some times, because it is more better risking little than risking a lot of your trading account and then at the end of the day, you see your self losing so much of your money. We should protect our trading account.

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  11. #3680
    Registered user ola4real's Avatar
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    Quote Originally Posted by sniper007 View Post
    For sure I do know my risks and all that and also, I try as much as I can to take it seriously. Knowing that the forex trading market is so much complex, I stick to two percent risks some times, because it is more better risking little than risking a lot of your trading account and then at the end of the day, you see your self losing so much of your money. We should protect our trading account.
    It is a good thing for us to know our forex risk, this is a risky forex business, it is knowing our risk who can help us to plan for what to do in every of our trading. Forex traders who did not know their risk will only be losing as a results of the aggressive trading methods, that is bad. This is why it is good that we know our risk before we make a trade, and we need to work on the proper risk management with it, that is the only way the risk will not affect what we are doing in forex field.

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