| Four Market Risk Management Trading Errors |
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| Written by Reece Mathews |
| Monday, 12 April 2010 15:42 |
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You are on the wrong track if you haven't set up a risk management system. Some new traders specifically neglect this pre trading step because they are mainly concerned about earning. It's important to realize though that in trading, you can only really make significant gains if you follow a reliable procedure.
You are on the wrong track if you haven't set up a risk management system. Some new traders specifically neglect this pre trading step because they are mainly concerned about earning. It's important to realize though that in trading, you can only really make significant gains if you follow a reliable procedure. In trading the process you would have to apply is your personal plan or system. A good plan often involves paying attention to the sizable section of controlling risks. Before you can successfully do so, you need to steer clear of common mistakes. #1- Lack of knowledge over personal risk tolerance. It goes without saying that different people have different levels of tolerance for pain. The same is true for risk tolerance. You can always say that you know full well that risk is involved in trading. What matters more however is knowing just how dangerous trading will be for you. Your risk management system is what helps you define the amount or level of risk that you are willing to take. This can help make your expectations even more realistic since you are indicating a specific loss degree. #2- Not specifying a stop order. You can easily indicate how much you are willing to lose. You have to take one step further though to ensure that you only really suffer bearable losses. A good way to keep you out of hot water at the right time is to use stop orders. When prices start to go the other way, a stop order can give you a profitable way 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. A critical part of your plan involves setting maximum loss. Traders who still have some ounce of fear in them may set this figure too low at below 1%. Others who feel that they know full well that trading is risky may set figures that are too high at 5% or more. Setting your sights too low in managing risk can limit your profit potential. On the other hand, setting it too high would mean facing the possibility of having to let go of a good portion of your capital. An ideal figure would be around 2%. #4- Allocating trading capital for different uses. Trading is similar in a lot of respects to businesses. Common sense will therefore tell you that one of the first things you need to plan for is your trading float or capital. This is to help ensure that you will only use a set amount for trading. In some cases, traders specify general floats for a variety of trading markets. If you are just starting out though, it is more sensible to reserve your capital for one market only. This is a good way to protect you from losing too much because of your lack of multiple market expertise. 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. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. Discover More About Trading Risk Management. Visit http://www.trading-secrets-revealed.com. |