Understand the Risk. Accept the Risk.
Trades that offer the potential for a high return almost always come with a high amount of risk. A smart trade comes with an understanding of that underlying risk. However, merely understanding that risk isn’t enough. You have to be able to accept that risk. In 2021, I was in the mindset that my trading strategy was sound just because I was able to define the risk of my trades and set my exit and take profit levels.
However, I learned that understanding risk isn’t quite the same as accepting the risk. Too often, I found myself worrying about a trade even though I defined my risk. This owes more to the psychological aspect of trading – often something that is the biggest roadblock to being a successful trader. Looking back, I realized that just because my risk was defined didn’t necessarily mean I accepted the risk.
If a trade is causing fear or psychological discomfort, it should warrant a timely review of your entire strategy with a specific emphasis on risk tolerance. Moreover, given the mental acuity demanded to trade in today’s dynamic markets, it is important to keep yourself as sharp as possible. That means keeping yourself healthy with a regime that includes adequate sleep, diet and exercise.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.