Understanding Risk Tolerance Is The Key To Trading Success

News 26 May 2017

In today’s hyper volatile trading environment caused by geopolitics as well as monetary policies, it is extremely vital for Investors to clearly understand the fundamentals of risk tolerance in order to achieve success in trading

First of all, Investors should be clear as to how much capital they would like to set aside for trading

Once the amount is decided, they should then be honest and ask themselves how much paper loss they can afford and which type of amount would not disturb their sleep at night. We usually recomend an amount of between 5 and 10 percent. Some may be able to withstand a paper loss of 15 to 20 percent. Of course, the higher the tolerance, the greater the flexibility in executing strategies that will yield higher returns – what we call risk/reward ratio

Once the paper loss ratio is understood and decided, Investors should then talk to their wealth advisors and ask them what are the current themes in the global financial markets

A wealth advisor should be able to list to their clients what is “going on’ in the financial markets on the whole and then explain to their client how to best capitalize on these themes using a various number of asset classes

Upon every trade that is executed, it is important for an Investor to understand the kind of risk he is undertaking in order for the kind of reward that he expects. He should also be fully prepared to pay the particular price for the risk undertaken if things do not work out as planned

Some wealth advisors tend to focus only on a positive outcome and do not prepare their clients for adverse consequences and when an client is not prepared, it leads to a vast misunderstanding as well as adverse effects and unpleasantness

Before a wealth advisor boasts about making money for his client, he should first understand the character and philosophy of his client towards investments and analyze what kind of Investor his client is and why he is Investing in the financial markets

Clients who are risk averse should be offered strategies that tend to preserve wealth more than creating new wealth whereas a client who is susceptible to a healthy amount of risk taking should be offered strategies that are geared towards wealth creation

And the most important factor of all in this game, surprisingly, is time and not money. For example, a client whonhas $50 million at his disposal for 20 years will be able to create wealth for himself as he has a time frame of 20 years wheras a client with $50 million for just one year will have to be more careful. People like Warren Buffett can be extremely successful because they can afford the luxury of time which can then be used to create more wealth

A deep understanding of the global financial markets by a wealth advisor and/or a shining track record is an added bonus for a client. Clients should be given the right to ask their wealth advisors all the questions that they want in order to understand completely the background, philosophy and the level of experience of their wealth advisor and please, do not assume that your wealth advisor can do miracles just because he is a CFA (Chartered Financial Advisor)

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