Risk Tolerance: Determining How Much Money You Can Afford To Lose in Trading

What is risk tolerance? Is it important even if you trade with an excellent trading platform like MetaTrader 5? Risk tolerance is understanding how much you are willing to lose in a single trade. There is so much more to understand about this topic and it is an important component when it comes to trading and investing. For you to determine your risk tolerance, you should have a clear understanding of one’s ability to take in huge market swings which could impact your investments. But take note, if you take on more risk than you can afford you will end up panicking with uncertainties in the market and you might end up selling your positions at the wrong time.

Getting To Know About Risk Tolerance

Risk tolerance mostly depends on a person’s age although that is not the only determining factor. But generally speaking, those people who are in their younger years tend to take on more risks than people who are older. With greater risk tolerance, it becomes synonyms with ETFs, equities, and equity funds. For lower risks, these investments include bond funds, bonds, and ETFs.

It is important to understand that age isn’t the only determining factor in switching asset classes. Those traders who have the capacity to take greater risks might also consider changing their asset class. When assessing one’s risk tolerance. You may need a couple of things. This includes questionnaires and risk-related surveys. As a trader, you should also gain access to the histories of worst-case returns over the asset that you are trading. This is the best way to gain some idea about the possibility of losing your money and how much it would be.

Another factor that could affect risk tolerance includes your earning capacity in the future, the time horizon that you should invest in, the presence of other important assets like pension, home, Social Security, and inheritance. More importantly, you tend to stomach more risk if you have other stable sources of income.

Benefits of Using an Expert Advisor

What is Aggressive Risk Tolerance?

Most of the time, aggressive investors are also market savvy. They already have a thorough understanding of the market as well as the propensities which is the one that allows individuals as well as institutions to purchase investments even on highly volatile markets. Although they face maximum risks with their investments, they can also expect maximum returns.

What is a Moderate Risk Tolerance?

Investors with moderate risk tolerance adopt a balanced approach when it comes to intermediate-term of five years up to ten years. These types of investors mostly pursue a 50/50 structure. The most common strategy they use is investing half of their portfolio into a dividend-paying fund.

What is a Conservative Risk Tolerance?

Investors with conservative risk tolerance mostly accept little to no volatility on their assets. These people are mostly retirees that have spent years building up the funds that they used for investment, therefore, they don’t allow any sort of risk and uncertainties. They target investments with sure income and little to no risk at all. These risk-averse individuals mostly prefer bank deposits, preservation of capital, money markets, and U.S Treasuries. They don’t prefer trading on MetaTrader 5 with markets like Forex and CFDs.