PRINCIPLES OF TRADING: RISK MANAGEMENT

It is imperative for traders to master risk management, which includes knowing how much you could lose per trade or over time and evaluating the peril entailed in each trade or methodology. A well-written trading plan should outline different strategies to curb losses and the amount of money you can afford to lose. Losses are inevitable. Still, you can do something to curtail it.

The very first phase of risk management is recognizing the likelihood of losing some or all of the money in your account. In some instances, you can end up owing more. Trading is an unending cycle of winning and losing – closing winning trades, controlling losses, and learning from mistakes.

Probability is one of the most important measurements of risk. Unless you have the power to see the future, one can never determine the market’s future movement. It is important to depend on probability to assimilate the odds of making a right trading decision. Probability can be expressed as a decimal or a percentage. Either way, start evaluating risk by looking at the possibility to lose and not just the possibility to win.

Understand risk enables us to make sound decisions and develop safer and more profitable trading plans. By testing a plan on historical data we can study performance reports indicating the system’s projection or the average amount of money gained or lost on every trade during the set period. A trader can compute the average profit he can expect to earn by dividing the aggregate net profit by the total number of trades.

Before we end the discussion, here are some tips to minimize losses.

Choose the Applicable Leverage and Margin

Like we have mentioned before, focus on potential losses instead on potential profits in order to use leverage and margin wisely. Remember, it can make or break your trades.

Consider Trading as a Business

Trading is similar to running a business. You need to set up a strategic plan stating the instrument(s) to be traded and suitable trading techniques. Do your homework, test historical figures, apply it in actual trading, and assess on a regular basis.

Integrate a Protective Stop Loss

Reducing the loss on every trade helps a lot in maintaining your trading capital. Optimization and experimenting are the best ways to figure out the best stop levels.

Pick the Right Equipment

If you can obtain the best tools, by all means. We are talking about the fastest and most reliable internet connection, most advanced computer, glitch-free trading platform, best analysis, and the like.

Select the Appropriate Position Size

No one wants to lose too much, right? In case you have discovered a new trading plan in the market, give enough time to prove its worth before scrambling to increase the position size. Patience is a virtue.

Stick to Trading Plan

What’s the use of gauging the probability of trades if you will just skip trades, stay in too long, or close out prematurely? Not sticking to your trading plan makes you ditch any expectancy from the system.

Now, have you heard of strategy automation? We will tackle it next.