What is risk management?
Risk Management is without a doubt one of the key skills to learn in trading. It doesn’t matter how good you are at predicting the markets, you must be good at protecting yourself against losses if you truly want to invest successfully!
So, what are the basics of risk management?
Whenever you make a trade you run the risk that you’ll lose money – that’s a fact of trading. However, there are several techniques you can use to keep your potential losses to a minimum.
Control your emotions
You should be making decisions with your head, not your heart. If you’re nervous or excited about a trade, that’s typically a bad sign and you should take a moment to cool-off and think about the reasons for making the trade in the first place. Try to keep to your trading strategy as much as possible.
Only risk a small amount of your capital
You shouldn’t risk more than a small percentage of your capital on a single trade. By putting too much of your capital into one trade you risk getting wiped out if things don’t go your way.
Risk vs Reward
You win some, you lose some. That’s a simple fact of trading!
When you make a trade you should always look at two things: what is your potential risk and what is your potential reward. The more risk you’re taking, the higher your reward should be. Make sure you always carefully weigh up these factors before you open any new trade. Be strict with yourself – if the risk is too high, you should simply walk away.
Patience is a virtue
Being patient is also a key skill in trading. You should never rush into a trade. By taking the time to do your research and weigh up the risks you’ll be less likely to make a bad trade and more likely to turn a profit. You shouldn’t trade in markets or currencies you’re not familiar with either. It can be exciting to experiment with a new strategy but you should do plenty of research first.
Practice, practice, practice
If you’re new to trading or unfamiliar with a particular market, get plenty of practice before trading. With Skilling you can open a demo account that’ll let you trade with virtual funds at no risk whatsoever – this way you can see how your strategy performs before putting any real money on the line.
Use stop loss orders
Stop Loss orders are an essential tool to ensure potential losses don’t spiral out of control. For more information about stop loss orders, read this article.
Having said that, be careful not to place your Stop Loss orders too close to your opening position. After all, you are trying to put yourself in a position to make some money on the trade. If your Stop Loss is too close to your opening price it could effectively close out your trade before it’s had a real chance to make a profit!
As mentioned at the start of the article, Risk Management is key. In fact, some would say it is THE key! Be sure you read and re-read the articles in the Academy related to this - all good traders pay maximum attention to it and we can’t stress it enough. Practise good Risk Management and it is half the battle won!