By Admiral Markets

Dear Traders,

Most market players recognise the importance of risk management.

However, this doesn’t prevent us from failing to correctly implement a trading risk plan.

Did you ever wonder why controlling the risk in trading can be so challenging?

This article will teach you how to defend yourself against riskless behaviour and
fearful trading.

Moreover, I will show you how your trading behaviour makes you vulnerable.

Trader’s risk perception fluctuates

The reality is that people behave differently, depending on whether they experience loss or profit:

…a trader who keeps losing will risk more…

…and a trader who keeps winning will risk less.

Our emotional reaction to winning and losing decides whether we go for a more conservative or aggressive approach in trading.

The problem with fluctuating risk perception

The biggest problem is that your good intentions regarding trading
risk management can quickly become obsolete.

Even if traders know how important risk management plan is…

…the dynamics change once real trading kicks off.

A few losing trades may make you think further risk is acceptable – and winning trades may cause you to act overly cautious.

To learn more about proper risk management plans, check out our video below.

Your trading risk profile

The reaction to risks are not the same for all traders because their risk profiles vary.

In fact, there is a wide range of risk attitudes:

…some traders are born risk takers…

…while other traders are very conservative…

Your risk attitude affects
how and when you react during periods of losses and profits.

Traders with higher trading risk tolerance tend to risk more when losing – but not necessarily lose risk appetite when making profits.

At the same time, traders with lower trading risk tolerance tend to lose risk appetite when making profits – but not necessarily risk more when losing.

Remember that all traders encounter both wins and losses – there is no possible way to avoid that.

How to battle your risk weakness

The first thing you need to do is adopt the right trading risk attitude.

Be honest with yourself and analyse what type of risk attitude you have.

See the table below to check when you are vulnerable to being too cautious or too risky.

Once you know your risk attitude, you can start improving your overall trading risk implementation.

Let me give you two examples:

1. if you are a risk taker, you need someone else to manage your risk for you
2. if you are too cautious, walking away from the computer could help remove the temptation to take profits too soon once your take profit is hit.

Ultimately, the important lesson is that…

…understanding when and why we make mistakes in trading risk management comes first…

…and after that, we need to make a tailored analysis and actually work on improving it.

Traders are human beings – and as such, they are vulnerable to the bias of viewing risk in different perspectives.

Hopefully, this article helped you increase your awareness – and start making steps towards improving your trading.

Cheers and safe trading,

Chris

Article by Admiral Markets

Source: How your perception of risk can sabotage your trading

Admiral Markets is a leading online provider, offering trading with Forex and CFDs on stocks, indices, precious metals and energy.