How to determine your trading risk tolerance

Every individual has a risk tolerance that should not be ignored. Any good stock broker or financial planner knows this and should make an effort to help you determine what your risk tolerance is. Then they should work with you to find investments that don't exceed your risk tolerance.

Several things are involved in determining risk tolerance. 

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First, you need to know how much money you need to invest and what your investments and financial goals are.

For example, if you plan to retire in ten years and haven't saved a dime for it, you should have a high risk tolerance – because you will have to make some aggressive – risky – investments to reach your financial goal.

On the other side of the coin, if you're in your early twenties and want to start investing for retirement, your risk tolerance will be low. You have the luxury of watching your money grow slowly over time.

Realize, of course, that your need for high risk tolerance or low risk tolerance actually has nothing to do with how you think about risk. Again, there are many things that determine your tolerance.

For example, if you were invested in the stock market and watched the movement of that stock every day and saw that it was falling a little, what would you do?

Would you sell everything or let your money go? If you have a low risk tolerance, you might want to sell. If you had a high tolerance, you would let your money flow and see what happens. This is not based on what your financial goals are. This tolerance is based on how you feel about your money!

Again, a good financial planner or stockbroker should help you determine the level of risk you are comfortable with and choose your investments accordingly.

Your risk tolerance should be based on what your financial goals are and how you feel about the possibility of losing your money. It's all connected.

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