Risk management in trading
Risk management is one of the critical concepts of long-term success in the financial markets. It helps a trader to protect his account from losing all of his or her money. No trader can have 100% winning trades all the time. To succeed as a trader, the size of your potential losses needs to make sense compared to the original profit potential on each position.
No matter how good you are, or how experienced you are, without proper risk management, you are going to incur losses. Risk management helps cut down losses. Without appropriate risk management, you will lose all your trading capital or more and will have close positions in your trading account at the wrong time.
Risk management rules
To be a successful trader, you need to follow some practical rules of risk management. They will guide you in your trading journey and will protect your trading profits.
Limit your trading capital
An important rule when trading is to trade as much capital as you can afford to lose if things go wrong. If you follow this rule, you will trade without feeling too much pressure. Protecting your trading capital doesn’t mean not having any losing trade. Protecting capital means not taking any unnecessary risk. Some factors you should consider when deciding the amount of capital you will trade are your financial situation and needs, your trading objectives, your tolerance for risk, and your previous experience as a trader.
Conduct your own stress test
You need to learn to manage your stress to make more profits. When the pressure gets too high, you lose money. A beneficial way is to conduct your stress test. Calculate the worst loss, which may occur to you and decide whether you can afford it. If you can’t, limit your trading position to something you can handle.
Always use a stop-loss order
Before entering a trade, you should always use a stop-loss order to protect your account balance. A stop-loss order is created with the purpose to limit an investor’s loss on a security position. Stop-loss orders are used to exit positions after the price moves against you. Successful trading involves balancing risk and reward. You may decide not to enter some traders if the profit potential is too small compared to the initial risk. Stop-loss orders also help with time management. They have triggered automatically, meaning you don’t have to be glued to the screen monitoring your positions.
Warning of high risk: Trading at all levels and in all its forms represent an activity of elevated risk. As it is entirely possible to suffer heavy losses when trading with any online broker, trading is not an activity that is suitable for everyone. Traders must be aware of the fact that returns are not guaranteed and that they may lose some or all of the money they have invest. As such, it is of the utmost importance to only every trade with disposable funds you can afford 100%. Before getting started traders must actively consider their goals, expectations, attitude to risk, and personal financial circumstances. You need to know the risk involved when trading and understand exactly how to proceed, by following your trading style and situation. If you require advice or assistance, it should be sourced exclusively from a registered independent financial advisor.
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