Giles Coghlan LLB, Lth, MA
Financial Source
There is a number of common human weaknesses that mean it can be hard for us to manage risk. Sometimes, if we are in a vulnerable situation, we can look for one single financial answer such as putting on one big, risky trade. Other times we may struggle to recognise when we are wrong in our trading decision and we keep moving our stop loss further and further away. The impact of not managing risk is profound and we look at some of the impacts below.
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You will stop trading. If you find yourself unable to manage risk eventually you will stop trading. This can be very frustrating for a trader who was managing risk and making money, but in one reckless move loses all their profit and some more. A failure to manage risk is one of the biggest reasons traders quit trading.
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Personal impact. If you lose a significant sum of money, by not managing risk, you will damage your state of mind. You also risk putting relationships with your family under strain if you have been responsible to manage risk for the family.
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You have a big profitable trade, but watch out. Strangely, by not managing risk properly, it can mean you have a very large outsized winning trade. You may feel elated, and so happy. However, watch out! The same reckless behaviour that led to you making a large amount of money can also lead to you losing a large amount of money.
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Stress. By not managing risk your equity will have large gains and falls. This is incredibly stressful to manage if you are seeing significant peaks and troughs in your equity curve. The high stress is unpleasant and living this way over the medium term runs the danger of impacting your long term health.
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Preoccupation with trading. Risking too much can often result in a trade on that you can’t stop checking. Every few minutes you look at the trade, you can’t sleep properly and check the position overnight. Perhaps you can’t spend time with your family properly because your trading is always in your mind. Being passionate about trading is fine, but being preoccupied with your trading is detrimental.
So, always make sure you manage risk. You can adopt a patient approach to trading but put in some good habits so that you mitigate the impact of taking risk.
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Editors’ Picks
EUR/USD off highs, back to 1.1850
EUR/USD loses some upside momentum, returning to the 1.1850 region amid humble losses. The pair’s slight decline comes against the backdrop of a marginal advance in the US Dollar as investors continue to assess the latest US CPI readings.
GBP/USD clings to gains above 1.3600
GBP/USD reverses three consecutive daily pullbacks on Friday, hovering around the low-1.3600s on the back of the vacillating performance of the Greenback in the wake of the release of US CPI prints in January. Earlier in the day, the BoE’s Pill suggested that UK inflation could settle around 2.5%, above the bank’s goal.
USD/JPY edges up above 153.50 with all eyes on US CPI figures
USD/JPY appreciates above 153.00 but remains on track for a 2.4% weekly loss. Trading volumes remain subdued on Friday, ahead of the IS CPI release. The Yen remains supported by hopes of a stable government and calls for further BoJ tightening.
Editors’ Picks
EUR/USD off highs, back to 1.1850
EUR/USD loses some upside momentum, returning to the 1.1850 region amid humble losses. The pair’s slight decline comes against the backdrop of a marginal advance in the US Dollar as investors continue to assess the latest US CPI readings.
GBP/USD clings to gains above 1.3600
GBP/USD reverses three consecutive daily pullbacks on Friday, hovering around the low-1.3600s on the back of the vacillating performance of the Greenback in the wake of the release of US CPI prints in January. Earlier in the day, the BoE’s Pill suggested that UK inflation could settle around 2.5%, above the bank’s goal.
Gold: Upside remains capped by $5,000
Gold is reclaiming part of the ground lost on Wednesday’s marked retracement, as bargain-hunters seem to have stepped in. The precious metal’s upside, however, appears limited amid the slightly better tone in the US Dollar after US inflation data saw the CPI rise less than estimated at the beginning of the year.
Crypto Today: Bitcoin, Ethereum, XRP in choppy price action, weighed down by falling institutional interest
Bitcoin's upside remains largely constrained amid weak technicals and declining institutional interest. Ethereum trades sideways above $1,900 support with the upside capped below $2,000 amid ETF outflows.
Week ahead – Data blitz, Fed Minutes and RBNZ decision in the spotlight
US GDP and PCE inflation are main highlights, plus the Fed minutes. UK and Japan have busy calendars too with focus on CPI. Flash PMIs for February will also be doing the rounds. RBNZ meets, is unlikely to follow RBA’s hawkish path.
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