In trading we all know or maybe heard for once that risk management in Trading is very important. It is one of the most important key elements in trading. Maybe you have a trading strategy that gives you a winning ratio of 90%. But you still face losses and even can blow your whole trading account if you don’t manage your risk in trading. Professional traders also face losses but still they become a millionaire because they know how to manage risk when they lose. There are also some traders whose winning ratio is 30% and they still making money from the market. If you want to stay in the market for a long time and keep fighting back. There is no alternative to Risk management.
What is Risk Management in Trading?
Risk management is a process where you manage your risk and take minimum risks to maximize your profit and avoid unwanted losses from the financial market. The risk of losses arises when the markets move opposite direction of our expectations. The market can go the opposite according to your analysis due to many factors like political events such as elections, economic events like interest rate, CPI, PPI, and the effect of the news.
How Does Risk Management in Trading Work?
There are many ways to manage your risks. In trading how much of your trading account money you want to trade for a single trade defines your risk. Suppose you have 200 dollars in your trading account and you want just 1% money per trade. That means you risk a total amount of 2 dollars in your account. To blow your account it needs 100 consecutive losing trades. This is how risk management works. If you reduce your percentage it will increase your trading opportunity. On the other hand, if you take higher risk there will be chances of higher profit. But there you get fewer chances to trade and recover your previous losses. So it depends on the trader and his trading style.
Why Risk Management in Trading is so Important?
We use risk management to reduce losses if the market goes against us following an occurrence.
Although the temptation to seize any opportunity exists for all traders, we must understand the hazards of an investment in advance to ensure we can withstand if things go wrong. All successful traders understand and recognize that trading is a complex process, and that having a comprehensive risk management strategy and trading plan allows us to have a long-term income source. There are other key factors like money management, risk reward ratio, patient, revenge trading, emotion control, and FOMO. Those things will help you understand risk management and become a better trader. Because maybe you learn about all of the things about risk management. But to apply this you have to prepare in a mental way. You have to prepare mentally. Learning and applying are two different things.
Moreover things not going to work the same when we do things practically. Suppose you manage your risk properly and make a loss. One losing trade can destroy your mental condition. Then you forget about risk management and trade emotionally and randomly. Finally, you take all of your amount just in one trade. Thus it messes up your trading journey. So to use risk management strictly, those things need to develop in you.
How to Manage Risk in Trading?
There are a lot of techniques that you can use to manage your risk. I will discuss those topics which are easy and more effective for you.
Stop loss and Make a profit
It is the first and foremost rules of trading that always use stop loss and take profits. Use a particular ratio of losses and profit which is called the risk-reward ratio. It could be 1:2 or 1:3. It depends on your strategy. By using stop loss it will automatically stop trades when you book a specific amount of losses. It will help you make decisions against your emotions which is good. Because in financial markets. The big players or institute is not your enemy. Your own emotion is your enemy. So try to control it by using stop loss.
Trailing Stop loss
Trailing stop loss is an advance a little bit but a very effective way to manage risk. It is related to stop-loss techniques. In trailing stop loss you trailing it. It means if you open a position and the trade is going in your favor then replace your stop loss to another point. And this way you can trail it to 0 pips of stop loss. In this way, you can take zero risk in that trade. If the trade goes in the opposite direction, you may not book profit but will never lose a single penny. Cause the trade will stop at zero pips.
Hedging
Hedging is a way of managing trade risks. It means that when you start a trading position, you will also open a position in the opposite direction of your investment with the same asset. If your primary position loses, your secondary position will profit and compensate for the loss. , which holds the strike price for a specified period of time and allows you to exit the position at that price until expiry, are frequently used as a hedging strategy to reduce the cost of the alternative position.
The Famous 2% Strategy
The 2% rule is an investment approach in which an investor puts no more than 2% of their available capital at risk in any single trade. To implement the 2% rule, an investor must first determine their available capital, taking into account any future trading fees or commissions. If the trade is on profit then the next trade of 2% will be counted on the whole capital. And if the trade book on loss. The next trade also counts on remaining capital.
Reduce Risk with Broker
Now you can understand how important risk management is. Now the question is how brokers can reduce risk. Broker plays a vital role in that section. I will tell you how. You may be quite familiar with Spread. Most of the broker has a high spread which is almost 2% of your capital. So if you open a trade because of spread it will almost touch your stop loss. If the market is volatile then a little movement can hit your stop loss. And thus you face an unexpected loss. There are other disadvantages of some brokers that they do not support hedge. Hedging is a very safe method to avoid risk but most of the brokers don’t have hedging. But there are a few best and most reputed broker who has very little spread and they all support hedging. There they are
Reduce Risk Using The Best Trading Strategy
Using the best strategy is as important as using risk management. If you follow risk management strictly but your trading strategy has low winning. That means you will never make money from it even if you follow risk management. So a good trading strategy is needed. We have strategies that have a high winning ratio with a risk-reward ratio of 1:3 or even more. Must learn these strategies to boost your trading style.
Conclusion
The combined result of a good strategy and risk management will help you to get better results and become a good trader as well. There is a saying in trading that you don’t need to think about profits. Just try to learn to accept your losses. Profit will come to you automatically. So just skip losses. Take it as a process of trading. Manage your risk. The next trade will make big profits for you if you learn to cut small losses. Good luck and thanks for reading.