Forex traders at banks must answer to a risk manager.
You probably know that banks trade forex, in fact most banks have a team of forex traders. But do you know what banks look for in a forex trader? The answer may surprise you.
Banks are not searching for traders with:
- a stunning track record
- the ability to make money quickly
- a high win rate
Banks are searching for traders who do not take large risks. In fact, these are the only traders banks want on the forex desk. Banks want traders who will stay within the rules of the game. And the number one rule of the forex game for banks is this keep the risk at an acceptable level at all times.
Every bank trader has a number. This is the amount of money they are allowed to risk on behalf of the bank. With time and experience this number will creep upward, and every forex trader at the bank understands this. When a forex trader at the bank has too much risk on, when the risk exceeds their number, a risk manager will pull the trader aside and ask that the positions be lightened up to reduce the risk. The trader is also given one warning from the risk manager.
What happens if the bank trader again exceeds the number? The risk manager will again pull aside the trader and explain to the trader that it is time to leave. The bank trader has no job because his number was exceeded. The trader will lose his job even if he made millions for the bank on the risky trades. Banks understand that the most important aspect of forex trading is keeping risk under control. The risk manager ensures that all forex traders do not risk too much. Each forex trader is given one warning for taking too much risk, there is no second warning, the second time a trader takes on too much risk he loses his job.
This is a great system. All forex traders at the bank know the consequences of taking on too much risk. The problem is this – many bank forex traders end up leaving their job, as many of them end up trading for themselves, as independent traders. However, on their own these former bank traders are missing one key ingredient for their success… the risk manager.
Without a risk manager many former bank traders end up losing huge amounts of money, and end up being unsuccessful in the long run.
Trading is a game of risk, and any trader who does not understand this will have a difficult time as a professional trader. If you trade at home, who is your risk manager? Who is going to tell you when you are risking too much? Who are you accountable to for your trading? If the answer is “no one” perhaps it is time for you to emulate the banks and find someone to report to each week.
