- You may have heard that 90 to 95% of the people who trade in the market end up on the losing side.
- This will happen due to many of the reasons, but the primary reason that will overshadow all the other ones is very poor or no risk management.
- Often many of the traders will fail to understand the importance and power of the risk management techniques.
- Generally, traders will want excellent trading systems but they will fail to recognize that an excellent trading system with poor risk management is of no use because every trading system has its own pros and cons.
Plan the trade and trade the plan
There are three main important aspects of trading.
They are as follows:
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- These 3 aspects are interconnected in such a way that if one of them is missing, the other 2 will eventually make no sense.
- For the long term success in trading, these are the 3 important qualities that are very much essential.
- This blog is all about risk management because if you are failing to manage your money then you will not have the right trading psychology.
- Also, an excellent trading system with poor risk management technique is absolutely useless.
- So, before you start to trade with real money, you will have to plan your trade by keeping these things in your mind.
Do not take the trade without planning a stop loss
- Taking the trade without setting the stop loss is like driving a break failed vehicle on the highway.
- You will never know when there will be an accident.
- As a trader, capital preservation should be your first goal and then you can think of growing up your trading account.
- Also, never leave your bank account unprotected when you go out to fight the battle of trading.
- This means that you should not trade with your real money unless you have your detailed trading plan.
- Your trading plan should include various things such as maximum loss that you can bear, what is your risk per trade, which signals needs to be taken as confirmation before entering into the trade.
- Of course, there are many more things which should be considered but these are the most important among all.
Why is capital preservation important?
- Usage of excessive leverage is considered to be a big risk in trading and it is the main reason behind the blowouts of the trading account.
- Even the best of the traders can lose all the money due to some sort of excessive leverage.
- Here, the main point that we should understand is that there are many good traders in the world and some of them even get deployed by major trading firms.
- However, not all of them will generate significant returns from trading because they will fail in managing the risk of capital and capital preservation.
- A good trader is not just someone who can analyze the charts and predict the next move in the market, but someone who can manage the risk of their capital with steady returns and can do this consistently with a trading edge.
- If you are lacking in your capital preservation, then some day you will end up on the losing side.
- For the long-term success, you should practice capital preservation again and again.
The process to be followed for making money as a trader is as follows:
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How to implement risk management in trading?
There are some of the many ways to implement risk management in trading.
They are as follows:
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Risk to reward ratio
- It is the ratio of the total risk of your capital to potential reward on a single trade.
- If this ratio is less than 1, then it will not make any sense.
- Look for the trade which is having a high risk to reward ratio greater than 1.
- If you are getting the trade which is having a risk to reward ratio of less than 1, then leave that opportunity and wait for the other one.
Setting up the stop loss
- This is the key factor while planning your trade because it will determine your position sizing and position sizing is nothing but how you will control your risk.
Position sizing
Position sizing is nothing but determining how many of the lots or the contracts you are trading during a single trade.
It is the distance between the stop loss and the entry point combined with the position size that will decide the amount of money that you will be risking on a trade.
Setting up the target
- You will have to set the target level logically.
- There are multiple ways by which you can place your targets like the previous support and resistance, and the daily market range, etc.
Psychology of the trader while exiting the trade
- Do not get emotionally attached with your positions, cut your losses at predetermined levels, and follow your trading plan.
Conclusion
Do not take any trade without planning.
Frequently Asked Questions (FAQs)
Q1) Why is risk management important in trading?
It will help to reduce the potential losses and increase potential gains.
Q2) Why is risk management important in the market?
It will help the investors anticipate the potential losses and make informed decisions.
Q3) What is risk in one word?
It is danger, or the possibility of danger, defeat, or loss.
Q4) Who is responsible for risk management?
Employers, managers, supervisors, or the upper management staff.
Q5) What is a bull stock?
When the stock has gone up 20% or more from the previous low for a sustained period of time.
About Us
Nifty Trading Academy is our academy where we teach you about the stock market as well as technical analysis. We also provide live trading sessions and upload blogs for the same.