Risk Appetite For Forex Traders
In this game, it’s important not to have eyes bigger than your stomach. Don’t take on risk you can’t stomach. I heard of a trader called Jason Leavitt on a “Chat with Traders” podcast some years back who said at the beginning of his trading career he could’ve been trading $50,000 account and have one trade floating an $8000 loss without phasing him.
I’m paraphrasing a bit here, so forgive me if those weren’t his exact words but something to the extent. And if you do the math, that is a 16% loss on one trade! Roughly 6 trades like that and you’re done.
You would’ve blown your account, and that would’ve been all she wrote. A 16% loss for someone else on that same account would’ve been enough to send them to the hospital. It’s important to know what you can stomach.
Your risk appetite also forms part of your trading personality. If Jason were to give you a winning strategy that usually floated those kinds of losses, but you couldn’t stomach that as an individual, you would start making mistakes.
Closing trades early because you don’t want to take a loss. Taking profits early because you’re scared price may go against you. All these decisions come from your emotions and not knowing your emotional capacity or risk appetite.
Take stock because the example I mentioned is the reason why not everyone can trade the same way. Now, that’s good news to some but bad news to others because they thought they could come into trading and just copy-paste, then start making money.
Making money with a strategy that does not suit you is not impossible, yet it would take some deep psychological work and restructuring your beliefs when it comes to money, which is an uphill battle for most people.
Risk appetite, however, is not set in stone. Like anything, it can be developed, expanded, restricted and moulded into a form that suits you.
It takes deliberate practice. Say, you start the week and set yourself a target to risk a bit more on at least 2 excellent setups this week. Over time, that could help you expand your risk appetite allowing you to put on bigger trades. But… There are two sides to this coin, or any coin actually.
There are some people who desire more risk but have a hard time stomaching it. But some people have eyes bigger than their stomachs and end up biting the dust because they overestimate their risk appetite, which leads us to…
Biting more than you can chew
When people start trading demo they are comfortable with taking a bigger risk because it’s FAKE money. Don’t go in a live account thinking you’re still going to be nonchalant about taking large risk. A good idea would to look at what you’re risking on demo and halve it. That’s what you MIGHT be comfortable risking on a live account (could even be less).
Check out 4 Considerations Before Trading Forex Live (Real Money) for more.
That’s the only difference between demo trading and live trading. It is the make-or-break because traders haven’t exercised their emotional capacity to a point where they can be comfortable risking what they were risking on a demo account.
The aim is to get your risk to a point where you don’t care about taking a loss anymore. You have tested your system, you have an edge, and a loss is just a business expense. Once you get it there, you’re golden!
If you feel like you want more out of your trading but can’t bring yourself to risk more, start small. Stretch your capacity just a little bit every once in a while and you will learn to be comfortable trading bigger positions, that should obviously still be in-line with your trading plan.
I say this because it is not everyone’s goal to flip an account many times over and shoot for a 300% return on investment. And for them, the kind of risk that comes with that is not worth it. Some people just want a steady increase in their portfolio, and they would adjust their risk appropriately to try and achieve those goals without rocking the boat too much.
- Risk appetite is different for everyone. This can be the factor that makes-or-breaks if a strategy suits you.
- Risk appetite can be considered part of your trading personality.
- What you are comfortable risking on demo should be halved, at least, when going live.
- Be aware of your trading goals. Not everyone has the same trading goals and risk has to be adjusted/managed according to those goals.
Don’t bet the farm.
Don’t lose your shirt.
Cut the L.
Keep the W.