Sophia Smith — FXStorm
That is my response to the question: “How much should one risk on a trade?” I make this comparison because in asking the question of how much to risk on a trade, I’m inquiring about someone’s risk tolerance, and that’s about as personal as it gets; I couldn’t have asked a more personal question. And no, it does not just refer to what your trading account balance happens to be, though practically, that is itself important. However, regardless of how large an account balance you have at your disposal, if you are nervous about risking your money, you are undoubtedly likely to run into a plethora of problems.
You see, everyone’s risk tolerance or comfort level, is different, and what dictates your personal level could be anything from an infinite number of possibilities. Life experiences go a long way toward dictating our views on money, loss, and consequently the capacity to expose trading capital to risk with neutrality, no feelings attached.
If we as traders were to be honest with ourselves we would admit that a vast majority of the time, we don’t really, truly accept the risk of the trades we execute. Just because it is accepted to be a risky occupation doesn’t follow that we really do believe that we can lose ALL the capital we expose on the trading table. We pick and choose the trades we take from our own trading strategy(ies), deciding to take the plunge on those we deem to be the ‘absolute winners’. By doing this, we, in effect, do not have to truly accept the risk, since they’re going to be winners anyway.
This is but one of the many lies we tell ourselves daily, because it’s a security blanket of sorts. It is safer to pretend we know what’s going to happen because to do otherwise means having to truly accept risk.
Acceptance of risk does not come easily for most, even if we know for a fact that we have a sound trading strategy that is profitable over the period of a series of trades. We still tend to get caught up on the individual trades and a roller-coaster of emotions.
Why then, is it so difficult to truly own and accept risk? It’s a psychological issue. I firmly believe that the psychological component of trading does not get the rightful recognition and respect it deserves. It is this aspect that can make trading one of the most difficult and trying ordeals we have ever encountered, and have yet to experience.
Fear, frustration, impatience to wait for a particular trade to set up. These are all ‘symptoms’ of having not accepted risk. In many cases this all-consuming fear of risk could quite accurately be classified as a phobia. By definition a phobia can be described as ‘an excessive, intense, and persistent fear of certain situations’.
How then, do we overcome this fear/phobia and get to the point where we fully accept risk and automatically execute our trades with no emotion involved? It is a process; Start by identifying the largest reasonable amount you can risk on a trade without feeling the least bit uneasy. If you experience even a twinge, lower the amount until you get to a comfortable figure.
Not everyone will be willing to do this though, because it might mean going from a standard account type to a mini, or from trading mini lot sizes to trading micro lots. However, if you can successfully accomplish this, I truly believe that you will be amazed at the changes you will experience in your performance and personal growth as a trader.
Till next time, trade confidently.
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