It’s an interesting question that I hear often – how much money can I expect to make or alternatively, what returns can I expect? When asked this question, it is pretty clear that the person is relatively new to trading and investing, or perhaps is approaching things in the wrong way because the question doesn’t take into account one of the most crucial aspects to trading and investing, risk profile.
So why is risk profile as an investor so important?
Not taking your personal appetite for risk into account can sometimes make trading and investing stressful experience – when to be honest, it really shouldn’t be. Being stressed when trading can be brought about by a number of factors including:
The instrument you are trading
Perhaps this has too much leverage for what you are used to or are comfortable with for example you are trading a CFD instead of a share.
The amount of dollar risk on the trade
The size of the trade may be bigger than what you would ordinarily trade because the tip was a good one!
The risk profile of the trade
The trade has big profit potential but has a lower probability of being a winner.
The time zone you may be trading
The market you are trading is later at night and you are tired or not able to follow it as closely as you would like
The time frame you have elected to trade
Maybe this is a shorter term trade – on a 5 minute chart, for example – when you are more used to a longer term investing approach
Your trading psychology
You are new to trading and have yet to get used to the specialist skills required as a trader.
How to fix things
If you have ever experienced any of the above, the best way to fix things, is to start by working backwards. In other words, what level and type of risk are you comfortable with and then use that as your parameter for developing your strategy.
All of us are hard-wired differently. For example in our 20s and 30s, our goal may be more aggressive growth strategy, because when younger, we may be more comfortable with risk. Alternatively, as we transition to retirement, we are likely to be more conservative. This could be the same person – just at a different stage of life and investing – and with a massively different risk profile. As such, being aware of this and that your risk profile will change over time can go a long way to reducing stress.
Further to this, we all have a natural series of strengths and weaknesses. Leveraging off of your strength – the natural or innate gifts we all have, can often be a far easier path to take rather than trying to use an approach that simply doesn’t sit well with you, perhaps because it was recommended by somebody else.
Investor Profile Quiz
As such, we have developed a simple yet highly effective Quiz that can start you on that path for learning more about who you are as an investor and what your natural strengths most likely are. From there, it is far easier to identify the types of strategy and instruments you are better suited to!
A good example of this was at school – and while that may be a few moons ago for many of us – we generally had subjects we enjoyed the most – and almost certainly they were the subjects that we achieved the best grades. In reality, trading is very similar.
Discovering the approach that you are best suited to – that perhaps matches you risk profile – will go a long way to reducing the stress of trading and, while at school you got the best grades in your favoured subject – in trading we don’t have grades, only profit and loss to measure our progress. By investing based on your natural strengths and personality, you are likely to get your best profits.
Bringing this natural advantage to the table can only help, so why not find out where your natural strengths sit and take the Investor Profile Quiz right now. It will only take a couple of minutes, and it is free.