The best traders in the world focus on risk, not the potential profits that might come in the future. So what is risk in the context of trading? Every time a trader places a trade they are entering the world of the unknown. No one can know with any certainty how the market will behave in the next few seconds let alone the duration of your trade. The only thing we can rely on is probabilities. What is the probability of your trade being profitable? And what will you lose if you are wrong? Often our students ask us: how much money they can make from trading forex? Our reply always is, “How much are you prepared to lose?”.
1. Plan your trades
‘By failing to prepare, you are preparing to fail’. These wise words by Benjamin Franklin apply to Trading. It is crucial for a trader to plan their trades in advance in by plotting stop-loss and take-profit levels. This also helps you calculate your expected return because not only do you have an idea of how much you’re going to lose but also how much you’re going to gain.
2. Risk only what you’re prepared to lose
Make sure you only use capital that is not required for your day to day living expenses and use only a percentage of your hard-earned savings Don’t expect to earn a living from trading from day one. It will take time to master this skill. There are two ways to learn trading, trial and error or learn from an expert, both have a cost.
3. Follow the 1-3% Risk Rule
The future is unpredictable, which is why you can never tell if your next trade is going to be a winner or a loser. You could even have a series of losing trades, By risking between 1-3% of your trading account for each trade is key to not losing your entire trading capital. Even if you do have a series of losing trades this will give you time to review your trading strategy to make sure it still has a positive outcome over time.
4. Always use Stop-loss orders
Regardless of your trading strategy ALWAYS have stop-loss orders with each trade you place, this will protect your account from either a planned exit if your trade is a losing trade or protect your account for unexpected big moves in the market.
5. Follow your strategy
It’s very unlikely you will find a trading strategy that wins 100% of the time. This means there will be times when you have losing trades and possibly a series of losing trades. If you have stuck to the 1-3% rule you should not suffer a major loss to your account. At this time you will be tested to either continue by placing the next trade or give up. If you are to succeed in the long term sticking to your strategy will always be the better option.
No matter how well you risk manage your trades, if you don’t have a trading strategy that suits your personality and meets your personal goals or expectations, you will find it difficult to be consistent and profitable. Spend time learning a strategy that has no more than a few simple rules to follow and have a full understanding of how it behaves in all market conditions.
Trading comes with high levels of risk if you do not know what you are doing! If you would like to speak to an Expert Trader to discuss your Risk Management Strategy, please book a call here.
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