Six Steps to Effective Risk Management
2022-08-31 14:57:56
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1.Confirm risk tolerance

This is a personalized indicator for investors who decide to invest in any market. Many trading instructors will set the tolerable risk for each trade at 1%, 2% or even 5% of the total account. However, setting such a figure is usually just out of habit. Due to lack of knowledge about trading, unfamiliarity with the trade itself or with the trading system, novice traders often lack confidence and choose a lower percentage of risk.

For example, if you adopt a trading pattern with an average of 1 trade per day and set the tolerable risk for each trade to 10% of the opening balance, then, in theory, it would only take 10 consecutive losing trades to make you lose all the money in your account. Even for veteran traders, it doesn't make much sense to take that much risk on a single trade.

Conversely, if you set the risk limit at 2% per trade, you would need 50 consecutive losses to lose your opening balance. Which do you think is more likely to happen, 10 consecutive losses or 50 consecutive losses?

2.Customized trading contracts

There are a myriad of trading methods available in trading. Some methods allow you to set specific stop-loss and profit targets, while other methods vary greatly in this regard. For example, if you use a 20 pip stop order strategy for every trade and only trade the EUR/USD currency pair, it is easy to figure out how many trades you need to make to reach your investment target. However, it is much more difficult to do this calculation when using a combination of trading strategies with different stop loss targets and even different currencies.

In this case, one of the easiest ways to make each actual trade meet the risk level you set is to customize the trading position.

If you want to set the risk value of your EUR/USD trade to $15 per pip fluctuation, you cannot trade on a standard lot, because a standard lot trade will require an adjustment to that value. Instead, choosing a mini or micro lot trade will satisfy the demand. If you want to set the value of risk to $12.50 per pip, you cannot trade in standard or mini lots, but only in micro lots.

3.Timing

It can be frustrating to not have time to trade when a profit opportunity is available. Since trading in the Forex market is continuous 24 hours a day, this can easily happen, especially for short term traders. The most logical solution to this problem is to create or purchase an automated trading program, but many traders may be skeptical of this technology or wish to retain control of their trades, and this solution is not feasible for them.

If you do not have access to the Internet, you can manage your risk by trailing stop orders. Trailing stops are an important part of any trading strategy. A trailing stop can be used to make more profit when the market price is positive, while the trade will be automatically terminated once the market price reverses by a preset amount.

4.Avoid weekend gap 

This can lead to the failure of a pre-set stop or take profit target. The failure of a take profit target is not always a bad outcome, while the failure of a stop loss is not. Once a stop loss is invalidated, the order is triggered and the stop loss order is executed at the best market price according to the market liquidity reality. In this case, the trader may suffer losses far in excess of what he or she can afford.

It is not difficult to avoid this by simply exiting all trades before the end of the week, or you can even take advantage of the short jump phenomenon by using the short jump trading technique.

5.Follow the news

For traders who need to manage their risk, news is something they need to focus on. Specific news such as jobs data, central bank decisions and inflation reports can cause the market to move dramatically, with effects similar to a weekend jump, but often more rapidly. Just as a weekend jump can go right past a stop or target, the same phenomenon can occur in just a few seconds after major news occurs. Therefore, unless your trading strategy is to take advantage of price fluctuations caused by the news, it is usually safer to trade after major news has occurred.

6.Trade within the limits of affordability

Trading platforms live by the trading bible that you should never invest more than you can afford to lose. The reason this saying has become so popular is that it is indeed an unbreakable truth. The trading process is both complex and risky, and putting your entire fortune on the line in hopes of accurately predicting the ever-changing market is akin to betting your entire fortune on the roulette table at a Las Vegas casino. So don't risk your hard-earned wealth: choose a smart, long-term investment strategy.


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