Risk management is one of the most influential aspects in preventing your trades from going wrong. Among the management strategies, risk tolerance is the crux.
Basically, risk tolerance translates to your version of ‘okay’ condition to lose money in order to pursue a bigger profit. This term heavily involves possibilities in both losing and winning.
Besides a set of strategies and rules of thumbs to follow, it is even better to incorporate your personal factors in determining your tolerance. After all, risk tolerance is never one-dimensional as it relates to other aspects, including the traders.
Moreover, more than 90% of forex traders fails due to not including their personal tolerance in their risk management. The reasons, perhaps, might be due to pure ignorance or not knowing what to consider.
Thus, we will suggest some things for your consideration upon setting your tolerance.
Also Read: How Much of Risk Tolerance You Can Take in Your Investment?
Current Lifestyle
The very first factor you should take into consideration is your current lifestyle. Accordingly, this consists of your regular income, the ‘free’ money available for you to trade, the living expenses, and so forth.
By assessing your current position and availability, you will be able to make a sound judgement on your trading without putting yourself in a risk you can’t handle. Most traders lose continually because they keep on taking risks that they should have avoided.
Capital
Speaking of risk, it is always closely related to your capital. The capital you have helps dictate the risk you should take or avoid.
Accordingly, your trading capital can determine whether you can possible survive a bigger trade or not. Logically speaking, the bigger your capital, the bigger your survival chance.
Knowledge and Experience
Do you consider yourself having a plenty of trading knowledge and experience? If so, you might have a bigger control over your emotion and instinct on trading.
As much as we hate it to say, this might be the main problem with novice traders upon setting their risk management or tolerance. They tend to get ahead of themselves and this arrogance leads to their very own demise.
Also Read: Risk of Ruin in Trading and Its Danger
