Mistakes to Avoid in Trading Risk Management
September 8th, 2010 | by admin |A trading money management system is not always part of every trader’s plan. Investors who are particularly focused on making profits may be particularly guilty of not having this element in their plans. They may not be fully aware though that to make good cash in the markets, one has to follow concrete steps.
In trading the process you would have to apply is your personal plan or system. A good plan often involves paying attention to the sizable section of controlling risks. Before you can successfully do so, you need to steer clear of common mistakes.
#1- Not knowing your tolerance for risks.
Some people can take higher degrees of pain than others. The same can be said about risk. Some are better able to take high risks than others. This is a crucial fact to remember in trading because it is just not enough to say that you know that risks are involved. A proper risk management system states the exact loss that you can endure. This means you always know before you make any trades how much trading capital you might lose in case a trade doesn’t work in your favor.
#2- Not having a stop order.
It’s one thing to know how much loss you can tolerate. It is another matter to make sure your limits stay where they are supposed to be. One way to make sure you bail out just in time from a bad position is to set stop orders. Once values drop below your predefined figure, you can take the door out.
Instead of ordinary stops, you can also incorporate trailing stops in your market risk management plan. This is a good tool to use because it allows you to ride a good trend until it starts to take a downward turn. Trailing stops rise as prices rise but stay where they are when prices start to drop.
#3- Indicating maximum loss that is too low or too high.
Maximum loss is obviously a necessary part of any risk control plan. Those who want to stay extra safe may choose to go for no more than 1%. On the other end of the spectrum are the extreme risk takers who may peg maximum loss at 5%. Managing risk too tightly isn’t good because you will lose out on profit potential. Clearly though, it is also a bad idea to risk too much since you might end up eroding your trading float. Settle for a maximum loss of about 2%.
#4- Allocating trading capital for different uses.
Trading is similar in a lot of respects to businesses. Common sense will therefore tell you that one of the first things you need to plan for is your trading float or capital. This is to help ensure that you will only use a set amount for trading. In some cases, traders specify general floats for a variety of trading markets. If you are just starting out though, it is more sensible to reserve your capital for one market only. This is a good way to protect you from losing too much because of your lack of multiple market expertise.
Creating a trading money management system is not something you can leave for later. This is perhaps the biggest mistake you can ever make. Secure yourself from severe losses by giving due attention to this aspect of your trading system.