What is your trading risk tolerance?

Share on facebook
Share on twitter
Share on linkedin

BLOG OUTLINE

  • Section: What is risk tolerance?
  • Section: Types of risk tolerance
  • Section: Steps to determining your risk tolerance
  • Section: The importance of risk tolerance.

BLOG INTRODUCTION

Risk tolerance in forex trading. How do you manage risk as a trader? How can you determine your risk tolerance? Learn what is risk tolerance and how to implement trading strategies with low-risk tolerance.

Learning how to manage risk tolerance is key for anyone who wants to be a successful forex trader. Having the lowest possible risk tolerance could be the difference between your success or failure as a trader. Risk tolerance is one of the most important parts of trading. Knowing your risk tolerance and knowing how to trade accordingly is key.

What is risk tolerance?

The definition of risk tolerance is the amount of money that can be lost before an investor becomes extremely uncomfortable. The amount is relative to each individual trader.

Risk tolerance can be expressed as a dollar amount, a percentage of total capital, or as a percentage of gains.

Risk tolerance is important when determining how much a trader should allocate to each trade. It is also essential when implementing the proper stop loss. Each trader will have a different risk tolerance based on their trading goals, their account size, and their personality.

An example of risk tolerance could be expressed as $1,000 or 10% of total capital and 20% of gains.

Types of risk tolerance

Essentially, it is the amount of risk you are willing to take on when you are trading currencies. In other words, it is what you’re willing to lose.

There are three main types of risk tolerance in forex trading:

  1. Conservative: You are willing to accept lower returns than other traders in order to minimize risks and losses.

  2. Moderate: You are comfortable with some risk but want to maximize your return on investments.

  3. Aggressive: You have a high appetite for risk and want to maximize profits.

The importance of risk tolerance cannot be understated. In fact, many beginning traders start off with a high level of risk tolerance because they are convinced that their system is foolproof. They quickly find out how wrong they are and become disillusioned with trading due to their increasing losses and dashed hopes.

Steps to determine your risk tolerance

What are the steps I can take to determine my risk tolerance in forex trading?

The first step to determining your risk tolerance is to ask yourself how much risk you’re willing to take. This may seem like a simple question, but it’s one that many traders neglect to answer. In order to determine your risk tolerance, you must first identify what type of trader you are:

Do you make trades on a whim?

Do you make trades while listening to music or watching TV?

Or do you carefully plan out each trade before making it?

Once you figure out how likely it is that you’ll trade impulsively, you can calculate the maximum amount of money that is safe for you to invest at once. If it’s likely that you’ll impulsively place a trade, consider investing no more than 5 percent of your account balance in a single trade. If, on the other hand, you have a detailed trading strategy and are unlikely to place an impulsive trade, then consider investing 10 percent of your account balance in a single trade.

In addition to determining the upper limit of your account balance vs. the amount of money invested using each method of trading, it’s also important to determine what amount of profit or loss will be enough for you to close

The importance of risk tolerance

In forex trading, as with any financial market, risk tolerance is extremely important. You might invest in a currency and then it drops in value—what happens? You may have done your research to see if the currency was at a good place for investment, but even so, what if you were wrong? It’s important to have the right amount of money to invest in order to maintain an appropriate risk tolerance.

We can say that your risk tolerance is based on how much money you are willing to lose. For example, you may want to put $1000 into stock trading, but your boss says you can only afford to lose $100. Therefore, your risk tolerance is $100. If you want more money to play around with, you would need to increase your income until your risk tolerance was appropriate for investing the larger amount of money. If you’re just starting out with investing, it’s best to start small and work up from there. If you’re older and have been financially independent for a while already, your risk tolerance might be very high because of all the experience you’ve had with investing.

Takeaway

As a trader before you being to trade currency pairs then you need to have a basic understanding of your risk tolerance. Do you wish to risk 1% of your bankroll per trade, or are you happy trading without risking any money until you have built up your account? You should know that you can never make 100% profits in forex even if it says so on the deposit bonus calculator site. If this is not clear now then read it again and again till you understand it. Once you understand your risk tolerance then choose the appropriate method of trading for your account size. Also, select a sensible stop-loss price and method for each position in your account.

 

Nairobi School Of Forex

Nairobi School Of Forex

Leave a Replay

About Me

Nairobi School of FOREX trading offers first-class and very comprehensive training programs to both retail and institutional clients in Forex Markets, Stock Indices, Commodities like Gold and Oil, from beginner level to advanced level

Recent Posts

Follow Us

News Coverage

Sign up for our Newsletter

Forex eLearning Course

Learn Forex with Kenya's most established Forex Trading Academy

***Terms and Conditions Apply

WhatsApp Us