Risk management is a key factor in trading. Most successful traders include a risk management strategy into their general trading strategy no matter if they are trading for the first time or they have been trading for 10 years in a row. Responsible traders will manage their risk in a way that partially protects them from unpleasant experiences. But why is this notion so important?
Risk management is the action of lowering the potential loss that can happen to your positions. This can be done in many ways, and it is not all in your hands – it depends on what the company you are trading with offers. Taking into consideration the risk involved in trading, any chance to prevent potential losses should be implemented where possible.
Main concepts which helps you better understand risk management are:
Stops and limits – Use risk management tools to limit losses and keep your profits secure.
Hedging – How you keep to open positions can impact offset risk.
One percent rule – Self-applied rules are able to control your trading and prevent huge losses.
Mentality – Understanding your state of mind which is more productive for you while trading.
Discipline – It stays among the most valuable behaviors that a trader can manifest.
How can you settle a good risk management strategy?
You need to know a couple of things first such as risk management tools, guidelines, trading rules, trading techniques. You need to establish good self-discipline and self-assessment.
Maybe you will need to put some new rules and follow them. For example, following a certain rule like the one percent rule, which can make sure your open positions are not exposing the major part of your available capital into the market.
Managing emotions is also crucial to be successful in risk management. Being unable to manage your emotions and your state of mind will raise the cost of your trading. Your weak state of mind will weaken your ability to conduct the risk analysis of the trades you are going to make. Even though it seems easy to manage emotional stability, it is proven to be difficult.
Let’s say that you are dealing with a loss, or a profit, if you are not strong enough to not let your emotions direct your next actions, it will be difficult for you to be profitable in the long run. If you close a position to get the profits, it is not a good idea to immediately re-enter the market with more capital to invest. Not two trades are the same so do not open/close trades because of the others. Good traders would resist the temptation and enter the markets when it seems right to do so.