How to Manage Risk in Trading Global Markets.
The essence of being and life itself differs across various spectrum of thought processes. Hence, begging the question, what is the essence of life? Conquering obstacles and challenges is what makes life enjoyable. Some believe that happiness lies in big things and will always strive to be more successful, sometimes at the cost of their personal lives. Thus, success is the essence of life. To some others, love, patience, peace, happiness, money, and time, amongst the host of many other factors, are the essence of life.
According to the philosophy of mind, Aristotle believes a soul is the essence of life. Aristotle says, “The actuality of body that has life.” Often times, Purpose is always misconstrued with Essence. Purpose is an object to be reached; a target, an aim; a goal, while essence is the inherent nature of a thing or idea. Most often than not, the general notion is that money or time is the true essence of life. As a person, I believe that time is the true essence of life. However, one thing is certain, individually, we have an inherent nature, which drives us to be either optimistic or pessimistic in life.
In the subject of life, one factor that can never be overlooked is called THE RISK FACTOR. There are numerous definitions of what risk is. But generally, risk is an exposure to the possibility of loss, injury, or other adverse or unwelcome circumstances. Risk is an uncertain event or condition that, if it occurs, has an effect on an objective. There are several kinds or types of risk, such as physical, social, health, business, financial, to mention but a few. For the purpose of this content, we would dwell much on the risk involved in trading global financial instruments.
Introduction to Risk Management.
Risk management simply is your ability to plan and control the risk you are taking with your trading capital. In other words, risk management refers to the forecasting and evaluation of financial risks together with the identification of procedures to avoid or minimize their impact. One thing we should all pay detailed attention to is the fact that risk management is a process. A process of identifying the risk, analyzing the risk, evaluating the risk, treating the risk, monitoring and evaluating the risk.
When it comes to trading global financial instruments, such as equities, commodities, indices, and forex, the most imperative facet of the business is the way and manner you manage your money. First thing first, when coming into the business, you have to be aware that there are four different traders. We have the big winners, small winners, big losers, and the small losers. With the right risk management, one can completely expunge the big losers. And that is what would give you as a trader, the sustainability that is needed in your trading business. In summary, one needs to understand that, profitability is your ability to manage your money, to give you the longevity in your trading business.
The first step in risk management is to structure the amount of money you make in the trading business. Not by the naira value, but by the percentage gain. I.e. in a month, you should be looking at how much you made percentage-wise and not how much money you have made. Right money management can give you the numbers you desire. As you can produce a logical and consistent percentage of returns, month after month.
When you are able to actualize the above, then you can start putting more money in your trading account, so as to spur your trading account to give you a larger account balance. That is the turn around that would give you the big percentages and earnings per trade.
Whilst trading, don’t think of it as how much money you can make on a particular trade, think of it as how much money you are willing and ready to risk on a trade, and how much money is your potential reward. In that sense, you are thinking in the sense of “this is the amount of money I am willing to lose, how much would I make?” that is how a professional trader thinks.
Basic Things You Should Know.
- Risk Capital: Risk capital is an amount of money that you would be comfortable loosing and that if lost, it would not greatly affect your current financial situation. When it comes to risk capital, there are two things you need to do;
- Ask yourself how much of your net worth would you be comfortable losing.
- Stay disciplined and consistent. I.e. if you are risking everything you have, then it is going to be very uncomfortable when you go through the dreaded but inevitable downfall that all trading strategies comes with.
2. Risk Per Trade: The amount of money that you are willing to risk each time you place a trade. The risk per trade is completely personal. I.e. know your risk tolerance, because it is going to affect your decision about risk per trade. We have high-risk tolerance and very low-risk tolerance. For new traders, control your emotions and have a straight mindset when trading.
3. Maximum Exposure: The overall amount of money that you are willing to have at risk at any one time. I.e. total amount of risk per trade. Your maximum exposure is the amount that you are willing to put at risk (expose) in the market at any one given time. I.e. number of trades I can be in at once. Maximum exposure is based on a percentage, so a trader as to determine his/her risk per trade ahead of maximum exposure. As an example, if a trader decides to risk 1% per trade and then decides that his maximum exposure will be 5% of his total amount, then that means that this specific trader can only be in 5 trades at one time.
In other to create a proper risk management plan, you have to have a spreadsheet capable of making the necessary calculations, in other to calculate your winning percentage and to calculate your maximum drawdown. As you embark on earning an extra source of living, trading global financial instruments with EGM, thereby creating the life you want, I wish you all the very best.
- Staff Writer, Eagle Global Markets.
-First published on egmanalytics.com
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