If you want to invest in any financial instrument, you will need to carefully study the related market, make sure that you have identified a number of timely and reliable information sources and align yourself with a reputable broker or brokerage. You will also need to identify and define your risk tolerance. This is especially true if you intend to trade in highly volatile markets such as the binary options or Forex markets.
In part, your risk tolerance is defined by the amount of money that you can afford to lose. If you lose too much on a single trade, you won’t have enough cash to successfully reenter the market. As a result, your loss will continue to exist, until you have saved more investment monies and have acquired the courage and the will to try again.
Rather than accounting for your overall capital, you have to simply focus on the amount of the assets that you intend to invest. It is obviously not prudent to dip into your monies for normal living expenses in order to keep your investment endeavors afloat. Thus, to accurately define the financial portion of your risk tolerance, start by outlining an investment budget that you can actually adhere to.
Asset allocation is another factor that will play a significant role in determining risk tolerance. This is the way in which your investment monies are spread out, whether across different markets or across different commodities, options or currencies. Having all of your proverbial eggs in one basket, causes you to shoulder an unnecessary amount of risk. For instance, if you sink all of your available cash for trading into a single trade or a single financial instrument, one wrong move could cause everything that you have worked for to fail.
This is why many trading experts are adamant about traders diversifying their holdings. If one investment fails, there is always the likelihood that others may pan out and actually generate profits. As a result, no single trade is placed under an undue amount of pressure to succeed and traders can wait these transactions out with calmness and clarity of mind.
What many people do not recognize is that risk tolerance is largely defined by investor emotions. You have to determine how you will react when the potential for loss rears its head. If you start trading beyond your ability to assume and manage risk, you will be in serious danger of making hasty decisions that cut your profits short or that create loss in circumstances in which loss may have been entirely avoidable.
You can determine your emotional reaction to potential loss by using a simulated trading platform. Practice making simulated trades with differing amounts of money and pay attention to your reactions. When you have gauged the peak level of risk that you can operate under without losing your cool, then you are ready to perform an actual trade of a very modest magnitude, in a real world setting.
One sure sign that you are making investment decisions and trading in accordance with your risk tolerance is the ability to ride a binary options or Forex trading strategy out, without altering course or veering from your trading plan based solely upon your emotions. This is how people are able to use diligent research and good follow through to glean profits in even the most volatile of markets. If you make last-minute changes without having a solid reason for doing so, excess risk and your inability to tolerate it will invariably cause financial loss.