fbpx

Risk management

Strategy, patience and manageable risk

Having an elaborate strategy for risk management in trading is an often underestimated aspect, but one that plays a crucial role in whether or not your trading is profitable over time.

A common recommendation from experienced trejders is to limit your risk by setting a rule that you cannot lose more than 1-2% of your capital in any single trade. This is considered to be good general advice as even the most experienced traders in the market can make mistakes several times in a row and a lack of loss limitation can then risk emptying the trading account relatively quickly.

With the above rules, you can lose a maximum of 100-200usd with a trading account of 10,000usd, which means that it takes a lot of losses in a row before the account is empty. You can also add that the maximum loss per trade varies depending on the size of the account, i.e. if you lose 2% on a trade, the capital will have lost in value to 9,800usd, which means that the maximum loss on the next trade will be 98-196usd (1-2% of 9,800). Similarly, you can of course count upwards when you make a profit instead.

Following this simple rule can increase your chances of success compared to those who do not apply any form of risk management.

Another important aspect of risk management is not trading with money you cannot afford to lose, which can sometimes be exciting and tempting when a really good opportunity arises. However, it is important to remember that all investments and trading in financial instruments involve a degree of risk. It is therefore important not to trade with money that you cannot afford to lose.

Trading with money you can't afford to lose is a major risk to your financial health and can cause serious problems in your life. It can lead to high debts and problems with payment defaults. In addition, it can affect your mental health and create stress and anxiety as you become too emotionally involved with the money.

To find out whether you can afford to lose money or not, you can put it in the context of your everyday life. If this money disappears, would my everyday life be affected in a negative way? Will I have difficulty buying food for the week? Will I need to borrow a penny to pay the rent?
Of course, losing money is never fun and it's natural to feel depressed and sad, but if the loss significantly affects your daily finances, it's money you can't afford to lose and you shouldn't put it at risk.

A common reason why people trade with money they cannot afford to lose is the hope of making quick money. They see others who have made big gains in the financial markets and think they can do it too. But it is important to remember that these gains are often the result of long-term planning and careful analysis of the markets. Trading with money you cannot afford to lose is not a sustainable strategy for making money in financial markets in the long term.

Another factor that can lead to trading with money you cannot afford to lose is a lack of knowledge about the different markets. Many people think they can trade in financial markets without having sufficient knowledge or experience. However, trading in financial markets requires a good understanding of the markets, technical analysis, psychological aspects and other factors that affect the prices of financial instruments.

It is important to take a realistic approach to the risks involved in trading in financial markets. Trading with money you cannot afford to lose is not a responsible or sustainable investment strategy. It is important to invest and trade with money that you can afford to lose, and to always carefully analyse and plan before making any decisions in the financial markets.

We humans also quite often have a desire to get a result or reward immediately when we do something that we think is good for us. Imagine that you are at the gym three days a week doing strength training because you want to increase your muscle mass. When you look at yourself in the mirror after two days or two weeks, you don't see any noticeable change and start questioning whether this exercise is for you.

This is a classic example of wanting to see results quickly - preferably immediately after an action has been taken. However, this is not how it works; it takes time and requires continuous, long-term action to achieve the desired result.

An everyday example;
"Two people decide to make a change in their lives. One wants to start eating one cinnamon bun a day and the other wants to take a 20-minute walk a day. After a week, nothing much has happened. Even after a month, you can't notice any difference. However, after 1 year, person one has gained 3kg while person two has lost 3kg. After a year, there have been a lot of cinnamon buns and a lot of minutes of walking."

The above may seem a bit comical but it involves a principle known as "the compound effect" or "the interest-on-interest effect".

It's exactly the same with investing - whether it's currency trading, stock investing or property speculation. You need to be patient and give it time. That's why by far the most common strategy in the stock market is to save monthly in stable companies and/or funds to let your money grow in the long run, rather than trying to pick the right time or the right company to buy.

When using an automated trading robot in the forex market, it is almost more important to take a longer-term view. Here we leave all trading to an algorithm to disconnect our own emotions, which reduces the degree of influence we can have on the trade. This is very nice as we can do other things during the day, but we must also be aware that every week or every month does not always provide a phenomenal return. What is interesting there is precisely how the return looks over 1 year, over 5 years and over 10 years. That's when those cinnamon rolls and walks really start to make a difference.

Unfortunately, there are many rogue traders out there who exploit our desire for immediate rewards. This usually manifests itself in guarantees and promises of high returns in a very short time, precisely to trigger the reward centre in the brain and make us think irrationally. We invest and start crunching numbers, dreaming and planning everything we can do with the money we earn in just a few weeks. And suddenly all the money is gone and the actor has disappeared without a trace. We realise far too late that it was not a legitimate operator and that "it was too good to be true".

At the end of the day, the most important thing is to have a healthy attitude towards your investments and to invest wisely and thoughtfully. While investing and trading in various markets can be an exciting and rewarding experience, it is important to always consider your own safety and health and to act responsibly at all times. There are many opportunities and different ways to invest your money, but it is of the utmost importance to be consistent, patient and have a long-term perspective.