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How to manage your risk while trading


Making money at trading is easy….the hard part is keeping it and then adding to it to make your account consistently grow!

There are many moving parts to trading; however, without managing your risk correctly it makes the rest irrelevant and generally leads to a short trading career!

The key to trading is to develop consistency to steadily grow your account. To do this requires discipline and control. There will be times when we are wrong, and the markets are unforgiving! Stop losses are essential to control those losses or you will wipe out your account. It is also important to manage the position when you are in a winning position to ensure you lock in some if not all the profit. We call this risk-reward, and a healthy minimum is 2:1. There are several trading techniques to assist with this.

Money management when trading

This brings me to money management.

The first thing I like to emphasise to new traders just starting out is to decide on the maximum you will invest in yourself to become a trader. Once you have decided that amount make a note of it or use an Excel sheet and each time you make a deposit deduct it. Should the total get to zero, stop trading for at least 6 months and practice, practice, practice on a simulator (which you should do BEFORE even risking your capital!).

So here we are. You have deposited funds into your account and are now ready to make your first trade: now the nerves set in as it suddenly all becomes very real!

Now let`s regress a step as I have a BIG question for you, how much will you risk in your first trade? Now, some traders calculate by percentage and others use real monetary numbers. If you are using the latter then you need to decide how frequently you intend to trade, how many trades you will make per day or per week.

Be clear on how you measure your risk capital

Once you have decided that then divide the capital you will risk trading per day or week by the number of trades and that effectively is how much you should risk per trade. As an example, if you would risk 100 and you intended to trade 5 times you risk 20 per trade!

Let`s imagine that you have a few winning trades, and your profit is 240! With a risk-reward of 2:1, if you are risking 100 on the day/week then 200 would be your minimum profit goal. You now have 40 more than that and then this requires a different discipline as now the goal is to ensure you protect some of that rather than give it all back to the market.

I would suggest risking the 40 and if it is a winner have another trade, if it’s a loss, STOP! Then wait for the next session you intend to trade. Remember, we need good days to pay for any bad ones!

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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