A Simple But Effective Risk Management Technique

It's probably not what you think, but doing this one thing will save you a lot of frustration in the long run.
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Risk Management – A Simple But Effective Technique

Just quickly following up on a couple of risk management questions that we had in the Q&A, now, we’ve offered lots of advice on how we prefer to manage risk. Some of the points you would have heard I say many times before is making sure that you’re not over leveraging.

So basically trading with no leverage or one to one leverage and only using leverage for those really excellent, and let’s call them no brainer sentiment shift trades. And we’ve also advised not to over leverage yourself by trading the same type of sentiment on multiple pairs at full risk.

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So for example, if you’re trading risk sentiment, you can of course, diversify by trading the Aussie yen pair and alongside that the Kiwi US dollar, but because you’re trading risk sentiment on both of them, it’ll be wise not to take a full risk position on each and rather split your position size so that you’re still diversifying the trade influences but also managing your risk at the same time.

Now, these are great tips to use, but there is another one that I want to stress at this point, which is something that many traders overlook, and that is doing risk management through improving your competency. A while back, we had Jarrett and that gave a great example of two people climbing a steep cliff.

Now imagine that the first climber is a very experienced climber with 20 years of rock climbing experience. And on the other hand, we have the other climber that is a newbie that have never climbed cliffs before. Now imagine that both of them were to climb for the very first time, they’re gonna climb the exact same cliff at the exact same time with the same gear and the same safety equipment. The question is, are both of them exposed to the same amount of risk?

Now, arguably, by being exposed to the same cliff, at the same time, they have the same gear, it might lead you to think so but when you think about it, just logically, the climber with 20 years of experience will actually be at far smaller risk of falling off, just because he’s been climbing for so long.

So even though it’s the first time he’s climbing that specific cliff, for him, it’s just gonna be another cliff face that he needs to navigate and climb. But for the beginner with no experience of climbing cliffs, it’ll be a very, very dangerous experience, even with all the same tools that the experienced trader is using.

So if there was someone that was basically taking bets on who would be better off at climbing the cliff, everybody would obviously be putting their money on the more experienced climber compared to the beginner.

So think of your risks, your risk management in the same way, right, even if you have access to the exact same tools at the exact same time, the same analysis, that compute your experienced traders, the risk won’t be the same, which makes things like basic risk management, very important because the lack of experience can cause the markets to really swallow you whole if you’re not if you don’t know what you’re doing.

Now, the great thing about this analogy is that there is something that you can do about it even today, right so as a beginner climber, they can drastically reduce their risk by just learning more about climbings and starting with smaller, less dangerous cliffs, and basically building up their confidence into climbing more difficult and more difficult cliffs. Now in the same way, as a trader, you can drastically improve your risk management by just simply working on your competency.

So making sure you’re working on developing your own trading process, working on understanding how the markets move, and why they move, understanding how to navigate certain trading environments, as opposed to just getting bogged down, you know, with how much percent you should be risking on this trade and how much percent you should be risking on that one.

Of course, those are important points but the more important point is by basically working on your competency and working on your consistency first and that will obviously reduce your overall risk in the long term as well.

So if you’re competent, then all the money management techniques in the world will assist you but if you’re not competent, of course, then none of them really help you anything or help you in your trading. And you’ll basically just lose money slower, but end up losing money all the same.

So make sure that you’re taking the necessary time to learn how the markets work, how they move, why they move, really taking the time to get to grips with the various aspects of the fundamentals and doing that, that’ll greatly reduce your risk and obviously improve your risk management and help you to gain a more stable, more consistent, more confident trading, a trading experience in the long term.

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