Newer traders love to take on big risk. The idea is that the bigger the risk they take, the more money they stand to make.
What is Risk?
Because so many factors go into the price movement, the outcome of any one trade can not be predicted. So any trade you take has a chance of ending up a loser and that is the risk you take… you risk your money to make money.
What is Too much Risk?
This is debatable and will change from one trader to another. Many professional traders advocate risking no more than 2% of your trading account, for others the number might be 1%, 0.5%, or even less. For me personally, I would say anything above 1% is too much (again, this will differ from trader to trader).
How taking Too much Risk can Influence your Trading:
Remember, the best way to be profitable is to have a strategy with a proven edge and executing that strategy with consistency. At the most basic level this means enter trades as per your strategy, then sticking to your stop losses and profit targets. Taking too much risk makes this so much harder because:
- Sticking to stop losses is hard, dealing with huge positions will make it even harder.
- Profits will look much bigger even before profit targets are hit which can lead to taking profits early.
- Revenge trading is a common problem among traders, big losses can amplify it.
- It makes it so much easier to blow an account.
- Big losses can have a big negative impact on the mind (trading psychology).
- It makes it so much easier and quicker to blame the strategy for the losses; it makes it harder to stick with a strategy.
- The bigger the risk the bigger your stress.
The solution?
With the above in mind, you have to find the level of risk that works for you. You can do this by starting with the lowest level of risk possible and stick with it for some time while monitoring how it affects you (again, while keeping the above in mind) or until you are comfortable with it.
Once you feel ready to take on a little more risk, do it, then repeat the process. Do this until you get to a level of risk that you are comfortable with. This might take some time, but in the end it will be worth it.
Finally:
Taking big risk is in line with instant gratification and short term thinking, while successful trading requires you to think longer term. Bigger risk might yield big profits, but it is not sustainable. If this has hurt you in the past, consider risking less and give it time.
Thanks so much for reading. I wish you all the best with your trading.
Thanks and Regards,
Trading SOS SOS