Nothing quite compares to the emotions and excitement of making winning trades. That momentum can make it hard to stop everything you’re doing and take stock of how you could increase your winnings. But for anyone who wants to make money and stay in the game, it’s important to learn how to manage risk. This isn’t something that beginners can tackle because it comes with real-time experience in the market. Managing risk will affect the position sizes and setting correct orders that will lead to better profits. Here are some ways to keep your risk to a minimum.
Setting Stops
The absolutely most important first step in managing risk is making a habit of always setting stop orders. This rule of thumb applies to all types of trading strategies. Find your stop placement by finding a line of resistance or support on the graph. Determine the correct location using pivot points or price action.
Setting Risk
After your stop orders are set, go on to the next step, which is deciding on the amount of your balance you can risk for each trade. This does not have to be the same percentage for every type of trade, but one place to start is with the 1% rule. In this case, you would not risk more than 1% of the money you have in your account on any open position. Depending on the trade and your situation, this could be increased to 2%, 3% or even 5%.
Setting an Exit
Don’t get into a habit of breaking your strategy by holding onto your position for too long. When you place your trade, also decide on the time you will exit that position. Don’t become so immersed in the magic of the moment that you make snap decisions that you will regret.
Learning from Loss
You cannot be afraid to lose or become depressed or discouraged from losses. If you realize that you will only win on a certain percentage of your trades, you will understand that losing is part of the game. Some say that each loss will bring you closer to your goal of success, so don’t be discouraged! Keep a positive attitude and know that if you lose this time, you have a good chance of winning on the next trade.
Consistency Counts
Always remember that you are in this for the long run. You developed a trading strategy and you are using a style that suits you. So put your confidence in your ability to come out a winner. Don’t second-guess every loss, but learn from it. Even if it amounts to lose, lose, lose, don’t become a Doubting Thomas and suddenly jump ship. Remain consistent, stick with your plan and enjoy the wins when they come. Remember that you’re in this long term and that no one wins every time.
The bottom line is that if you take time to carefully manage your risk, your efforts will be rewarded with better wins.
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