Risk management usually ranks really low on the priorities listing of most traders. However, without the right information about risk management, profitable trading is impossible.
A trader has to understand how they manage their risks, size their positions, create a positive outlook for their performance, and set the orders precisely, if you want to be always a lucrative and professional trader.
Here are 4 tips that can help you improve your risk management instantly and give a wide berth to the absolute most common issues that cause traders to lose money.
Entering orders based on the reward: risk ratio
Once you spot an entry signal, think where you’d place your stop loss and take profit order FIRST. If it doesn’t match your requirements, miss the trade.
Don’t decide to try to widen your take profit order or tighten up your stop loss to attain a higher reward: risk ratio.
Never even use fixed stop distances
Many trading strategies tell you to make use of fixed amount of points/pips on your own stop loss and take profit orders across different instruments as well as markets. Those “shortcuts” and generalizations completely neglect how cost moves naturally and exactly how financial markets work?
Volatility and energy are constantly changing and, therefore, just how much cost moves in every given day and simply how much it fluctuates changes on a regular basis. In times of higher volatility, you ought to set your end loss and simply take revenue orders wider to avoid premature stop runs and to maximize profits when price swings more.
As well as in times of low volatility you have to set your sales closer to your entry and not be overly optimistic.
Secondly, trading with fixed distances doesn’t allow you to choose reasonable price levels and it also takes away all of the flexibility you need to have as a trader. Always be aware of essential price levels and obstacles such as for example round figures, big moving averages, Fibonacci levels or just plain support and resistance.
Always compare win rate and reward: risk together
Numerous traders declare that the figure win rate is useless. But those traders miss a vitally important point.
It's so essential to understand that you neither need an insanely high win rate, or have to drive your trades for some time.
For example, something by having a win rate of 40% (that will be what numerous professional traders (average) only takes a reward: risk ratio of greater than 1.6 to trade profitably.
Trying to attain an astronomical high win rate or believing that you have to drive trades for a long time often create wrong expectations after which leads to wrong assumptions
Don’t use daily performance targets
Numerous traders will randomly set daily or weekly performance targets. Such an approach is very dangerous and you need to stop thinking in terms of day-to-day or regular returns. Establishing yourself daily goals produces loads of pressure and it frequently also creates a “need to trade”. Alternatively, check out ideas on how to set trading goals the right way:
A) Short-term (daily and weekly): Focus on the best possible trade execution and on how well you follow your rules/plan.
B) Mid-term (weekly and month-to-month): Follow a professional routine, plan your trades ahead of time, obey your rules, journal your trades, review your trades and work out certain that you learn the proper lessons.
C) Longer-term (semiannually): Review your trades, focusing on what well you executed your trades getting an understanding of your level of professionalism. Find weaknesses in your trading and adjust accordingly. This will cause profitable trading inevitably.