The Importance of Risk Tolerance in Forex Trading. There are many possible pieces of puzzles that you collect to make money. In this case the most important public area is money management. Money management is very important, of course, especially in understanding your risk tolerance in forex trading.
What is risk tolerance in forex trading?
So before we discuss further, we need to understand what risk tolerance really is in terms of forex trading. This means the amount of risk that you can tolerate per forex trading. Risk tolerance is a little different from money management.
What we mean by this is that some forex traders are very comfortable risking 5% on their trades. While other forex traders will see taking a 0.7% risk in the same arrangement. Overall, of course this is a little personal problem, because everyone and individual forex traders will of course be different.
To find out what your risk tolerance will ultimately be very important for your trading success. Of course, as if you were uncomfortable in a position, you might find yourself coming out too early.
Your initial analysis may be correct, and you find yourself jumping out of the forex market based on fear, not based on something substantial. There are some things worse than watching a position in your favor after you are a little scared.
How to determine your risk tolerance in forex trading.
Determining your risk tolerance is actually much simpler than you think. First of all, you must remember that understanding money management is important in forex trading. Here are some realistic examples:
Let’s say you take a set up and risk 2% of your total account at a stop loss. If you feel very comfortable with this position, then you know you are in risk tolerance. A simple exercise is to get up and walk away from the computer. Continue about your day and see if you worry too much about how that position works. If you can go to work, park, or spend time with family. Or traveling with your friends without checking your position often, you are definitely at your risk tolerance.
You find yourself more worried about trading.
In other trades, you may risk 3%. In this scenario, you find yourself more worried about trading, and see how it works quite often. If it causes you stress, it is above your risk tolerance. Very simple. We cannot tell you how many times we have found ourselves above our own risk tolerance. Then trade against us, then turn to us just to ask us to come out. Surely coming out of break even just to get rid of feeling uncomfortable. Naturally, the trade continues as we wish and we will clean up. Psychological stress can greatly influence the way trade works.
We will leave you with a simple exercise. Place trades with a total risk of 0.7% at the stop loss. Watch how you feel when you walk away from the computer and let the market do what it wants. If it doesn’t bother you, then the next trade must be 0.85%, with the same parameters and observations. From there, you only increase 0.35% every time you trade forex until you find that it is too difficult to leave the market alone.
Some people will feel comfortable risking crazy amounts of money, like 20%. It’s a very different conversation when approaching money management. Money management determines that you should not risk being exposed to such finance. But in the end it works in a reasonable range in finding where you can leave the trade alone. Of course to find out where the direction will be one of the main steps forward to becoming a much more professional trader. For what value, we have found our risk tolerance around 2%. Your property may be different, but in the long run these types of trade can develop into good returns.