Johannesburg, 04 Aug 2021
Learning how to manage risk in the financial industry is one of the key skills traders have to master. Currency pairs, stocks, indices or commodities are assets that can behave unexpectedly at various times, trapping those with little clue on how they need to keep market exposure under control.
There’s a growing debate around the “black swan” index and what that could mean now that it reached an all-time high. What’s for sure is that the notion of risk management is as important as a few years ago, even though markets are edging up on complacency.
Source: https://kamagroup.org/2012/01/24/manage-risk-in-6-steps/
Protecting capital in a world based on probabilities
Operating in the financial markets should be done with a mindset based on probabilities, given traders always need to anticipate how the right side of the chart will unfold. In such conditions, regardless of trading strategy, nobody is able to bank 100% accuracy.
Retail traders are also using leverage or margin trading, enhancing their ability to place larger trades on the open market, yet even though that might have positive implications for future returns, it also increases the risk in case traders make mistakes or don’t manage to forecast the price direction correctly.
Trading online professionally
Starting to trade professionally does not begin after a MetaTrader 4 download and installation. The platform plays an important role in the process, yet how each trader approaches online trading will be a key difference-maker.
A professional trader always evaluates risk first and then the potential reward. He will also work with regulated and trusted brokerage firms, which provide multiple security features, including negative balance protection. Treating online trading as a business is the best approach, considering money has to be invested, risk must be taken and the profit potential will depend on one’s expertise, ability to adapt to changing circumstances or other variables.
Reducing downside
The ultimate goal of risk management is to help traders reduce downside during a losing period. That will happen regardless of experience, making it imperative to place a stop loss for all trades.
A stop loss is a safety net putting a cap on the potential damage that might occur in case the market will not perform as expected. It should also be placed in an area that will negate the original forecast, signalling it is time to get out of the market before the price moves further into negative territory.
Understanding the math behind risk
Just because online trading involves a certain degree of risk, that does not mean it can’t generate returns. In fact, the risk can be measured and, by using mathematics, traders can see when the risk is skewed in their favour.
For that, they can use metrics like the risk of ruin, which will show what is the probability of losing money in the long run, based on a series of variables. The unpredictable behaviour of financial markets can work in favour of the trader, only if he manages to learn how to manage risk properly.
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