Risk management together with money management and a good trading strategy They constitute the three pillars on which every successful trading system is based, which every experienced trader must know very well.
Learning or not to manage risk during trading operations can be the difference between succeeding or failing in a field as complicated as this.
Although risk management is not very complicated, there are certain basic principles that help us operate with greater security and confidence. Let’s see them!
What is risk management?
risk management is the part of the strategy that specifies the size of the position, the size of the leverage and the levels of stop loss Y take profit. Good money management is a vital part of long-term trading success.
One of the most important rules in trading is don’t risk more than you can lose. However, many people (especially those new to the world of trading) make the mistake of investing and leveraging themselves for much more than is recommended.
A trader can have a great trading strategy and still fail and end up losing money if they don’t employ proper risk management.
Inexperience is possibly the main reason novice traders lose money on Forex and CFDs.. Being diligent with your money and risk management principles will increase your success as a trader and decrease your risk.
Basically, risk management is a combination of multiple ideas that serve to control risk in trading and that include the following principles:
- Define the batch size.
- Trade at times of the day with the highest volume
- Decide in advance the distance of the stop loss and profit
Why is it so important to control risk in trading?
Risk management in trading is one of the key concepts that every trader must apply if they want to survive in the market. It is an easy concept for most traders to learn, although it is not always easy to apply..
In the trading industry, brokers like to advertise the benefits of leverage and almost never clearly mention the potential losses that the investor may suffer if he misuses this leverage.
This causes many novice traders enter their trading platform with the mindset that they must make big profits without regard to risk control and money management.
A very effective form of risk management is loss control. Every trader should know when to cut their losses on any trade. In this case, the trader can use a stop loss order which the broker’s trading platform will execute automatically. Thus limiting your losses.
Some people, instead of using automatic stop loss, use a mental stop to exit the position when the price passes a certain zone. We do not recommend this at all. If you plan to cut your losses when the price reaches an area, then you put the stop loss there and you forget. In this way your emotions do not come into play and you get out of the operation when you should and not when you delude yourself into thinking that the price will return to profit.
On the other hand, it is just as well important that use the right lot size for your account. A trader who wants to survive and be profitable in the long term must control very well the size of the lots with which he trades, especially if his account has few funds.
In Traders Business School we have programmed an indicator that we call Easy Order that calculates your monetary management automatically. you have nothing but define the percentage of the risk per operation and the indicator calculates the lottery based on the distance where you place your stop loss.
5 Risk Management Tips in Trading
Yes analyze the market It is important, maintain proper risk management is equally or more important. Risk management in the forex market can be made easier with numerous instruments that you can use to help keep losses on your trades in check while maximizing your profits.
1. Stop Loss – Limit your losses
East is the standard method for limiting losses. A stop loss Properly placed, it generally reacts faster than a trader manually. This turns Stop Losses into a great tool for risk management.
Each operation is different, so it is necessary choose the appropriate Stop Loss level based on the price volatility that day. If the price is not very volatile you can adjust it more, and if the price is more volatile you should lengthen your stop a bit.
Depending on the distance of your stop loss from the market entry price, you will carry out the operation with a greater or lesser number of lots.
2. Lot Size
You must define, first of all, the percentage of risk you want to take on each trade. As usual, should be between 1-3%. This means that if we have an account of €10,000 and we define the risk per trade at 1%, our stop loss will assume a maximum loss per trade of €100.
We have a €10,000 account and operate at 1% risk per trade. On this occasion, we want to place our stop loss at a distance of 5 pips from the market entry price.
Our DTP Monetary Management Excel tells us that with that distance of 5 pips, we should enter the market with 2.29 micro lots.
You have this Excel available in our advanced courses. But you can also carry out perfect monetary management automatically with the indicator Easy Order.
3. Risk/Reward Ratio
The risk/reward ratiois a relationship that is used in Trading to measure, the amount of risk you have to take, to receive a reward.
The risk would be the price where you would apply your stop loss, and the reward where you would place Profit.
When we use this form of risk management, there is no need to cheat. This is very easy, you can place your stop wherever you want, and also your profit target.
We have to be realistand decide where you would actually come out, and what is the most likely target to take profit. Not the one you’d like, but the one the chart is telling you.
If you see an entry in which the stop loss has a very long distance and that the price can hardly travel that distance to obtain the same proportion of profit, you should directly discard that operation.
In short, don’t risk more than you’re willing to win.
Four. break event
What we try is that if the operation goes against us, not lose more money than we are willing to risk.
This of the Break Even, we should only do this when the trade has reached our first profit target (1:1) and we want to lengthen the input for more profit, making sure that if the price turns and turns against us we will not lose anything because we have moved our stop loss and turned it into a stop win limiting our losses.
5. Choose the leverage well
Choosing too high leverage (over leverage) will increase your risk, so a few negative trades can ruin your trading result.
Since August 2022 FCA regulated brokers offer two types of leverage:
- 1:30 in the case of retail customers.
- Up to 1:500 for professional clients.
Other regulations like AISC (Australia) allow leverage to all their clients of 1:500. Although, they are not subject to the guarantee fund for accounts of up to 85,000 pounds that the FCA regulation does offer.
risk management it is basically about keeping the level of risk always under control. The more you control your risk, the more flexibility you will have when operating, especially when you need it most.
trading in general It’s about taking advantage of opportunities.. By limiting risk, the trader ensures that they can continue trading when things don’t go as planned, which in turn will allow you to stay in the trade, ready for when new opportunities appear.
Apply a risk control system and proper monetary management it can be the difference between becoming a professional trader or simply being a victim of the market.
In summary, in Trading everything is a matter of risk and probability, the trader who knows how to handle this balance well will be a winning trader.
If you want to shorten your way to become a profitable traderwe offer you the possibility of taking a look at our Advanced Trading Course. You will work with a mentor in a personalized way and we will mentor you from 0 until your jump to the real market.