When it comes to risk management, it is important to realize it is a solvable mathematical problem.
All of the relevant parameters are in your control. All it takes is time, discipline, and educated adjustments going forward.
There should be no doubt about whether your system’s risk management is effective or not. If you lose too much all you need to do is adjust the underlying maths about how you size your positions, until your system is doing what it should.
If your system is not robust enough, it is not about your ability to pick the direction of the market. In-fact picking the market is the harder to solve but less important problem.
Which way the market moves is not under your control. You are simply riding the waves. The direction of the market is a problem you cannot fully solve. It’s is a matter of probabilities.
Yet your risk management is completely under your charge. When you trade, you’re always in control of the “how much” component. You control your position size when enter. You control when you exit (most of the time). When you combine these factors, you get risk management.
And let’s not forget the “how much” equation also controls the amount of profit your make when you trade. It is of supreme importance.
Too many traders will focus on trying to control what they can’t (the market) and neglect what they can (risk management). Time to make a change and get out your spreadsheets people!
Remember, you are a risk manager first, trader second, and analyst third. So take heart that, as a risk manager, you hold the power and are not at the markets whim.
Until next time,
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is the owner of www.fxrenew.com a provider of Forex signals from ex-bank and hedge fund traders (get a free trial). If you like Sam’s writing you can subscribe to his newsletter.