Risk Management – 1 rule to rule them all

What is Risk management?

Well google defines it as “the forecasting and evaluation of financial risks together with the identification of procedures to avoid or minimize their impact.” But to you and me it just means ways to reduce the risk. This is probably the most important part of trading and is the key to turning you into a profitable trader.

How do I do it?

  1. Keep trade sizes small. Simple right? having small sizes means you will be less likely to act emotionally on it and if it ends up being a loser then you have lost a small portion of your trading funds. If you loose 50% of your finds you have to win 100% to get back to where you started meaning its harder to recover from a large loss.
  2. Keep Emotion out of your trade. If you lose on a trade, well that’s fine, it happens. Don’t try to fix it by flipping positions or chasing a win. Just stop, and look for the next opportunity.
  3. Find the best opportunities. Taking too many trades will take its toll on you and just jumping into any old trade will likely lead to an overall loss in your trading fund. Focus on finding the best entries and taking profit when you reach your target. Sticking around for a greedy wins can backfire.
  4. Set a limit. Have a set limit on how much you want to lose maximum on a daily/weekly basis. Having this limit ensures that bad trading days will never lose more than you set and you will still have most of your finds ready for the next period. Loosing too much in a day will make it harder to recover in the next period without adding funds.
  5. Avoid big losses. We have all tried to recover from a loosing trade by doubling down ready for that reversal. Well it doesn’t always work and what we end up doing is increasing the amount we loose on that trade. Cutting a trade off once it reaches our stop limit means we’ve saved ourselves from a big lose and that should count as a win.
  6. Don’t play catch-up. If you miss out on a trade don’t try to get in late as you will be starting off in a bad position and could end up with a bigger loss than the potential gain.

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