Managing Risk- Four Mistakes Traders Make
A risk management system is not always part of every trader's plan
. Investors who are particularly focused on making profits may be particularly guilty of not having this element in their plans. They may not be fully aware though that to make good cash in the markets, one has to follow concrete steps.The procedure that you should follow in trading comes in the form of a trading system. There are many different systems that you can use. The best ones however, always make sure that risk management is always in place. There are some mistakes that you need to avoid when you plan risk control.
#1- Not knowing your tolerance for risks.
Some people can take higher degrees of pain than others. The same can be said about risk. Some are better able to take high risks than others. This is a crucial fact to remember in trading because it is just not enough to say that you know that risks are involved. A proper risk management system states the exact loss that you can endure. This means you always know before you make any trades how much trading capital you might lose in case a trade doesn't work in your favor.
#2- Not specifying a stop order.
It's one thing to know how much loss you can tolerate. It is another matter to make sure your limits stay where they are supposed to be. One way to make sure you bail out just in time from a bad position is to set stop orders. Once values drop below your predefined figure, you can take the door out.
This part of market risk management has two major types. One type that you might want to pay more attention to is trailing stops. If price rises, your stop order will rise too. It only stays put if price drops. Hence, you only exit when price drops below your trailing stop. Since you've already piggybacked on the previous rise, you'll have a tidy profit to collect after you exit.
#3- Setting maximum loss too tight or too wide.
Maximum loss is obviously a necessary part of any risk control plan. Those who want to stay extra safe may choose to go for no more than 1%. On the other end of the spectrum are the extreme risk takers who may peg maximum loss at 5%. Managing risk too tightly isn't good because you will lose out on profit potential. Clearly though, it is also a bad idea to risk too much since you might end up eroding your trading float. Settle for a maximum loss of about 2%.
#4- Allocating trading capital for different uses.
Identifying how much you are willing to set aside for trading is crucial. Obviously this is to prevent you from diverting funds for other purposes. If you plan on participating in various market types, you may consider settling for a general amount that will cover everything. If you are a novice however, it is often a good idea to focus on one market first and set your float for that one alone. This is to prevent problems from arising due to lack of market mastery.
A comprehensive risk management system is one of the most important elements to set straight. Aside from following the right steps to devising your own system, you also need to make sure you don't make the same mistakes that traders on losing streaks have made.
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