Four Market Risk Management Trading Errors

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 being able to determine risk limits.

It goes without saying that different people have different levels of tolerance for pain. The same is true for risk tolerance. You can always say that you know full well that risk is involved in trading. What matters more however is knowing just how dangerous trading will be for you. Your risk management system is what helps you define the amount or level of risk that you are willing to take. This can help make your expectations even more realistic since you are indicating a specific loss degree.

#2- The absence of a stop order.

It’s fairly easy to state how much you can lose. It takes a different step however to make sure you do only risk losing what you’ve specified. To ensure that you are out of a sinking ship just in time, you need to have stop orders in place. These are what will give you the signals to move out when prices drop.

This aspect of market risk management can also be implemented using trailing stops. Unlike static stops, this one can trail behind unit price. It only stays where it is once price starts to drop. This way, you can increase your profit potential while still enjoying protection from falling too hard.

#3- Indicating maximum loss that is too low or too high.

A critical part of your plan involves setting maximum loss. Traders who still have some ounce of fear in them may set this figure too low at below 1%. Others who feel that they know full well that trading is risky may set figures that are too high at 5% or more. Setting your sights too low in managing risk can limit your profit potential. On the other hand, setting it too high would mean facing the possibility of having to let go of a good portion of your capital. An ideal figure would be around 2%.

#4- Allocating trading capital for different uses.

Identifying how much you are willing to set aside for trading is crucial. Obviously this is to prevent you from diverting funds for other purposes. If you plan on participating in various market types, you may consider settling for a general amount that will cover everything. If you are a novice however, it is often a good idea to focus on one market first and set your float for that one alone. This is to prevent problems from arising due to lack of market mastery.

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.