Trading is quite risky, especially if you are a newbie trading highly leveraged markets like currencies, and commodity or stock index futures.The good news is, in trading you can control your risk to the last dollar.
Yes, you can absolutely fine tune the risks to your own appetite and comfort levels, with a precision that is not available in other investments types.
Most people start forex trading without much knowledge of the risks involved, or without having any risk controls in place. That’s why they end up losing a lot of money.If you learn a few basic risk management techniques, and put stop losses on every trade, you will be good to go.
Stop Losses are automated orders that will close your trade and book any losses at a certain price, if the trade does not go in your favor.
I am a trader and financial coach since the last 10 years. I trade forex, commodities like Gold & Oil and stock indices like SP500. Risk management has always been my forte. I’ve had bad trades obviously, but know when to cut short the losses. For the winners, I let them grow.
My risk management technique is simple and effective.
I do not exceed 2% risk on a single trade.
My risk exposure is no more than 6% of capital at a single point in time.
My portfolio is diversified to include currencies, commodities or indices and there is some sort of correlative hedge. All eggs aren't in the same basket.
Stop losses are in place on every trade. They are placed strategically at special price levels on higher time frames such as Daily and Weekly, so the likelihood of the trade being stopped out is quite low. However, if the trade gets stopped out, I lose a maximum of 2% of equity, which is easy to recover
I tune my volume to the predefined risk and chosen stop loss size.
I am able to use some decent amount of leverage safely within these risk parameters, so I can profit more.
I’m not finicky about risk:reward ratios and I try to maintain an average of 1:2. For example, if I risk $1000 on every trade, I try to earn $2000 on average from every trade. Every trade has its own anatomy, and the higher the R:R ratio, the better.
I will not close a trade unless at least 1:1 risk reward is achieved (except under rare circumstances). For example, if I risked $1000 on the trade, I’d like to bag at least $1000 profit, before I cash out.
This risk management style is more suited to Forex and Futures, where entry timing is more crucial, trading is more frequent, and higher leverage is a feature of the market.For stock trading, where leverage is limited, and market timing may not be an issue (such as buy and hold strategies), other risk management approaches may be used.