Risk is present in almost everything we do when it comes to forex trading, every trade we make is a risk, every time we increase our lot sizes or trade a new pair of currencies is a risk, risks are everywhere. Although risks are present, and there are ways to monitor and reduce them, there is one thing we cannot change, and that is our own tolerance or appetite for risk.
Risk tolerance is basically your ability to handle risk, it is an emotional state in which you are either tolerant of risk, able to handle it with a clear mind and objective view, or intolerant when you are not able to handle it so well, it will cause you stress, anxiety and may even cause you to place trades that you otherwise would not have made.
Your risk appetite is the amount of risk you actually want to take. For many, taking risks may seem strange, but for others it is something that thrills them and gives them thrills. In fact, this appetite for risk can cause people to trade too much, trade too big, and trade at a level that puts their accounts at risk. Others, who have a very limited appetite for risk, may not want to trade at all once they have experienced the risks involved.
That being said, how do you know if your own risk appetite is appropriate and reasonable? First of all, if you feel high anxiety or stress while trading, if you don't really feel like pulling the trading trigger for fear of losing something, then your tolerance and appetite for risk is gone. weak, if it is really bad then it may be a sign that trading is just not for you, there will be risks and trading is about accepting those risks. For some it is possible to get by and develop a better tolerance for trading, for others it is simply not possible and trading will therefore be a stressful situation for them.
At the other end of the spectrum, there are those who like a little too much risk, who want to place huge trades, who want to trade at all times, regardless of their strategy or the state of the markets. The more volatile the markets, the more they will want to trade, as the risk and reward are both much higher. This can be a dangerous situation because very little risk management is in place. These thrill seekers will get rich very quickly or lose it all in a matter of days, sometimes both, by making a few gains, gaining confidence and then losing it all because of too much risk.
These are the two extremes when it comes to risk tolerance and appetite . The bottom line is that there are actually things we can do to help maintain a safer trading environment. If, of course, you are in the middle of the risk tolerance and appetite levels, then you are in an ideal trading position, as you are able to tolerate risk and are not afraid of take a few.
So suppose your appetite level is high or low, what can we do to help? The first thing to do is to create a trading plan . In this plan, you will have defined certain rules, these rules are there for an important thing. They are there to ensure that you are in line with your plan and that your risks are limited. These rules will help people with a low appetite for risk to understand that they are still responsible and that trading by these rules gives them the essence of security, a way to control the risks they are exposed to.
For those with a strong appetite for risk, this will allow them to control the risks they take. Trading by the rules helps ensure that you don't make extra trades that you shouldn't and that you don't make trades that are simply too large for your account. Of course, it's up to the person whether they continue to follow it, but some discipline will allow you to manage your risks a little better.
Your risk management plan should also be in place. This plan outlines all the risks to which you are exposed, it will allow you to fully understand what these risks are and how you will reduce them. Make sure you understand where your stop losses will be , what your risk/reward ratio is, and other aspects of your trading. Everything mentioned above will allow you to maintain your risk and help you stay at the right level. When you trade according to the plan, you make good trades, whether it's a win or a loss, and by making good trades, you end up making profits at the end of the day. . The problem, of course, is sticking to that plan, which is often easier said than done.
So what level of risk appetite is reasonable? There isn't really one. Some people are in the middle, which is fine with them, but for many others, you're in a situation where you either like risk or hate it, but wherever you are on the line, you have to ensure that you have put in place everything you can to manage and reduce the risks to which you subject your account. Stick to these plans and you'll be in a great spot.