| Not everyone realizes the importance of a risk | | | | this one can trail behind unit price. It only stays where |
| management system in trading. This is especially true | | | | it is once price starts to drop. This way, you can |
| for novice traders who are more concerned about | | | | increase your profit potential while still enjoying |
| the bottom line. They are mainly interested in making | | | | protection from falling too hard. |
| money. Like every other major undertaking though, | | | | #3- Setting maximum loss too tight or too wide. |
| this usually involves following a process. | | | | A critical part of your plan involves setting maximum |
| In trading the process you would have to apply is | | | | loss. Traders who still have some ounce of fear in |
| your personal plan or system. A good plan often | | | | them may set this figure too low at below 1%. |
| involves paying attention to the sizable section of | | | | Others who feel that they know full well that trading |
| controlling risks. Before you can successfully do so, | | | | is risky may set figures that are too high at 5% or |
| you need to steer clear of common mistakes. | | | | more. Setting your sights too low in managing risk |
| #1- Not knowing your tolerance for risks. | | | | can limit your profit potential. On the other hand, |
| Just as different people have different pain tolerance | | | | setting it too high would mean facing the possibility |
| levels, individuals also have different endurance levels | | | | of having to let go of a good portion of your capital. |
| for risky deals. In trading it is not enough to say that | | | | An ideal figure would be around 2%. |
| you understand that there are dangers involved. A | | | | #4- Using trading float for a variety of investments. |
| good risk management system clearly defines just | | | | Identifying how much you are willing to set aside for |
| how much you are willing to lose on every single | | | | trading is crucial. Obviously this is to prevent you |
| trade. This concretely defined the requirement to | | | | from diverting funds for other purposes. If you plan |
| have realistic expectations because you will know | | | | on participating in various market types, you may |
| exactly just how much can go down the drain. | | | | consider settling for a general amount that will cover |
| #2- Not having a stop order. | | | | everything. If you are a novice however, it is often a |
| It's one thing to know how much loss you can | | | | good idea to focus on one market first and set your |
| tolerate. It is another matter to make sure your limits | | | | float for that one alone. This is to prevent problems |
| stay where they are supposed to be. One way to | | | | from arising due to lack of market mastery. |
| make sure you bail out just in time from a bad | | | | A comprehensive risk management system is one of |
| position is to set stop orders. Once values drop | | | | the most important elements to set straight. Aside |
| below your predefined figure, you can take the door | | | | from following the right steps to devising your own |
| out. | | | | system, you also need to make sure you don't make |
| This aspect of market risk management can also be | | | | the same mistakes that traders on losing streaks |
| implemented using trailing stops. Unlike static stops, | | | | have made. |