Trading is a challenging job, either emotionally or psychologically, but these problems are surprisingly easy to understand and solve. Many traders do not make profits because they lack an understanding of risk management and consider it insignificant. Risk management is identifying the extent to which risks are exposed and what levels of profit are expected. Without a sense of risk management, we may hold loss positions longer than necessary, and liquidation of profit positions occurs too early.
This phenomenon is widespread in actual trading, but in other respects, it is also very paradoxical. An example is when the winning rate is high, but losses are recorded in terms of amount. Due to the absence of risk management, the average amount of failure in the loss position is greater than the average amount of revenue generated in the revenue position.
So what are the ways traders can take a healthy risk management habit into their trading journey? Some guidelines to be followed regardless of the strategies or stocks that traders trade are as follows!
1. Set the Risk Compensation Ratio
Traders should know the profit-factor of their strategy. In other words, we must know how much loss they can tolerate and how much profit we can expect for repeating the same rules. Generally, the risk compensation ratio should be at least 2 (profit/loss). Setting a healthy balance can prevent entering extreme positions.
2. Use Stop Orders
Traders have to calculate the maximum losses they can endure and take advantage of the stop-orders. The realisations of profits might limit the profit, but we can prevent cases where losses exceed the total amount of profits. In particular, training stop order to secure profit is a beneficial method. This is a form of order that confirms the profit when the price reaches an expected level.
3. Use Stop Loss
To survive in the FX market, stop-loss orders must be used. The currency market operates 24/5, and it is not possible to limit the loss when we are not monitoring the market. Unexpected events could lead to significant losses if the stop-loss is not set. Plus, limiting the losses is so essential due to the geometric principles. If we lose 10%, we need to win 11% to recover the initial capital. And what if we lose 50%? We need to win 100% to get back to where we started. Stop-loss is powerful to limit the losses!
4. Fear and Greed
Traders who fail to overcome the market fluctuations are difficult to survive in the market regardless of how aggressively and systematically trained. Therefore, capital management and other techniques are necessary to stay in the market.
5. Separate Work from Emotion
One of the essential characteristics of successful traders is to separate emotions. They trade base on their pre-setted strategies without any feelings. Sometimes you have to endure losses and make intelligent investment decisions.
6. Recognise the Moment You Need a Break.
If you experience a series of failed tradings, it is time to pause and take a break. The best remedy is to stay away from the market for a while and take a few days off to refresh your mind if you experience continuous failure.
Continuing to trade under harsh market conditions can cause more significant losses and often experience psychological panic. Ultimately, if a failure occurs, we should accept it instead of trying to confront the losses.
There is always a possibility of loss in the world of trading, regardless of knowledge, experience, and proficiency. To survive in the market, we must minimise the losses to gain the next chances.
Rememer These Ten Rules!
1. Limit your losses.
2. Keep the profit position running.
3. Maintain position scale at a reasonable level.
4. Be aware of your risk compensation ratio.
5. Do it with sufficient capital.
6. Don’t go against the trend.
7. Do not enter the losing position further.
8. Watch out for market expectations.
9. Learn from your mistakes.
10. Set maximum loss or adjust revenue intervals.