What Fund Managers Need to Know About Risk Management?
As a fund manager or a successful trader, you manage risk on a daily basis. It’s one of the most important things you do. Risk management is a prerequisite to successful trading.
One of the key roles in risk management is to protect your trading capital as well as your clients under any circumstances.
It is fairly common to hear traders who generate substantial profits over a period of time can lose it all in just one or few trades. Most often, the common cause for failure is having a distorted view about risk management.
Traders often ignore risk management discipline and start risking big once they saw some trades moved in their favor. Thinking they have understood how the market works but not realizing the market never follows a fixed pattern repeatedly.
By working around with facts and figures, I am able to allow my strategy, Genesis Asset Monitor to remain rock solid.
Genesis Asset Monitor has been trading the currency market since 2016 with great confidence with a compounded return of over 300%. This astounding growth together with a relatively low drawdown percentage for the whole period are attracting more and more clients from across the globe to join my signal service.
How can you build a strong system?
One has to be aggressive to protect the trading or investment capital at all times. This is a cornerstone of risk management in your trading. If you take care of the downside, the upside will take care of itself, I often say to my clients and trading buddies.
I don’t chase after profits, but instead, watch my drawdowns obsessively. It is easy to get sidetracked and run after profits leaving doors open for risks to infiltrate the defense mechanism and destroy the capital in a heartbeat.
As I see my drawdowns start to widen, I will instantly apply risk mitigating steps to control them at an early stage.
Secondly, I do not take a Gung-Ho or all-in approach in my trades even the trade may seem too easy to win.
Greed and overconfidence are common causes of taking too much risk. On the far side, fear and no confidence will cause trading paralysis and eventually not able to seize the opportunity. Balancing both greed and fear needs lots of practice and discipline, which I have cultivated over the years of trading and learning.
Understand Your Trading System
You must have a good idea of the maximum exposure that you are willing to take. This is only possible if you have a workable and tested strategy. You have to know the strengths and weaknesses of the strategy and then take a very disciplined and calculated trade or position size.
When I am in a trade, I know very well where I will exit with profit or loss and managing the trades in between these two outcomes. Do not over trade. If you see yourself adding more trades, then you do not have a workable trading plan and this can lead to failure.
Smart Risk Control Technique
Never follow the general 2% money management rule, if you are a professional money manager.
Professionals tailor make their risk and money management that is fully optimized to their trading strategy and profitability of the system to produce the best returns with minimal risk.
If I trade using the general 2%, my Genesis Asset Monitor system can never produce the optimized performance. In fact the 2% rule will choke the system and make in extremely inefficient.
In my books Trade Smart with 10/20/30 Rule and Trade Forex with Confidence, I have dedicated a full chapter on how to set an appropriate risk level for the strategy. By analyzing my trade time-frames, trade positions, currency pairings and position sizes, I am able to keep my risk small while allowing the gains to remain strong and competitive.
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About the author
Ramesh is an active trader producing over 200% gain in 2017 and author of 3 trade strategy development books sold on Amazon. He is the creator the 10/20/30 Rule™ that could transform a mediocre trading system to become a top performer by following a systematic and thoughtful approach on strategy development.