The central concept behind any risk management strategy involves limiting your loss-making trades while maximizing your profitable trades. Any investment can naturally be summed up in two words: ‘risk’ and ‘reward’. The general rule of thumb is that greater the potential reward, higher is the associated risk. Accepting monetary risk is inevitable. In this article, I will explain the best ways in which you can reduce your risk in order to achieve a stress-free, comfortable and profitable trading career.
Choose The Time Of Day That You Trade:
Maximum traders tend to overlook the impact of the time of day that they trade. However, traders who are active during periods of fewer volatility tend to be more profitable than traders who trade during periods of high volatility. The high volatility periods for different currency pairs vary, but can generally be summarized as the opening hours of the Asian sessions, the London/European sessions, and the New York/American sessions.
Use Stop Losses:
Setting the right stop loss is one of the most important decisions in the entire trade setup. But too often, the stop loss/take revenue is set arbitrarily. It might be set at a stable size for every trade to cap the loss at a certain total. Or worse the stop loss might be decided simply by the amount of money in the account in an ‘all or nothing’ gamble.
A stop loss is a trading technique that takes you out of losing trades at a predetermined level in order to limit your losses. Utilize stop losses to ensure a 1:1 risk-reward ratio and above in all your trades in order to limit losses and maximize profits on each trade. For example, if you’re setting your stop loss at 50 pips below your entry point, set your take profit at least 50 pips above your entry point. If you are a more aggressive trader, you can use a 1:3 risk-reward ratio, where you risk 100 pips for a profit target of 300 pips.
Total risk exposure:
All open trades in which you bear risk create an overall exposure to risk. Those amounts you lose if all your transactions stop you. If you are awake at night thinking about your open trades, reduce your overall exposure to risk until your trade is stress-free. When I first started trading, it was higher than now. In my first year, my goal was to develop my account. Now my goal is to make my account more comfortable, given the longevity. From here and a decrease in the general risk.
Scaling In:
Scaling in is about building up your positions as price proves itself in your favor. So rather than taking a simple 2% breakout trade at $105, you might instead choose to take 2 1% positions at $105 and $110. To be more conservative still, you could enter 4 positions at 0.5% each. Straggling your stop loss as both triggers will really minimize your downside. This is a brilliant way to keep risk low, whilst letting your best-performing trades trip into a handsome profit.
If price decides to reverse and prove you wrong after your first entry has triggered, then you’ll lose half as much as if you had just gone straight in with 2%. You may also like to move your stop loss closer to price as your second position triggers. This will further reduce what you stand to lose.
Mental Exits:
Also known as collapsible stop loss. When I enter a trade, I set an initial stop loss, which is usually far from the price. However, this is my worst way out. Most likely, when the price breaks through the key support or resistance, I will move my stop loss closer to the price to take a smaller loss than where my initial stop loss was set.
This is called a mental exit. Because the stop-loss does not move until the price dictates. I know where my key exit level is before entering a trade.
Research:
Before investing in the share market, you should research your potential investment stocks. Check out the stock’s history, growth, earnings, management team, and debt load. Equate the results with other related investment products and to the other assets in your investment portfolio. You should consider consulting brokers with them before trading online; this will further lower your chances of incurring a loss.
Finally:
As a trader, you should use the above risk management tips as part of your trading strategy to increase your chances of reaching your potential. I hope this article has value for you. If so, please share with others.