Risk management is usually considered a priority for traders and is way more than just about finding a good indicator or more specific entry signals. Without having a proper understanding of risk management, earning profit through trading is hard to achieve. To become a professional trader you must learn to size the positions, set the orders correctly, and create a positive outlook for trading performance. Read on to find out how you can avoid common issues that lead traders to lose money.
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- Arranging the reward to risk ratio and ordersAfter having spotted entry signals you must figure out where to place stop-loss, then extracting profit order. When suitable price levels are identified for the orders, the risk to reward ratio needs to be measure. Continue with the trade if this matches your expectations.
- Avoid break-even stoppagesIt is recommended to protect your position, by dodging break-even situations. No matter the type of trading, take seriously the entry points. Avoid moving your stop too soon so as to prevent break-even halt getting out of profitable trades.
- Never implement fixed stop measuresSet a stop loss and obtain wider profit orders to maximize profits when the price fluctuates and avoid stop runs that are premature. Always be aware of important price levels and barriers, as it is important to set your orders in line with the entry in times of low volatility.
- Always compare reward to risk and win-rate togetherObserving and combining these two is typically perceived as the ultimate rule in trading. You must remember we are not running after an increasingly high win-rate, neither do we have to send out trades for long periods.
- Avoid using day-to-day performance targetsSetting goals daily may develop high pressure. Therefore, when setting trading goals the correct method is to pick short-term (weekly or daily), mid-term (monthly or weekly) and longer-term (semi-annually) targets.
- Execute position sizing When trading multiple strategies or setups, you may notice that each strategy and setup produces a different reward: risk ratios and win-rate. It is suggested that you reduce your position size on strategies with a decreased in-rate and increase the position size when your win-rate is higher.
- Using the R-multiple and reward: risk ratio simultaneouslyThe R-multiple refers to the performance measurement that predicts the final outcome of trading. By analyzing how the R-multiple relates to the reward:risk ratio, can help you gather new insights and identify major deviations.
- Take spread into consideration
Relevant costs can bring in significant drawbacks, turning a winning trading system into a losing one. It is suggested that you begin monitoring the spread closely and get rid of any instruments or times where spreads may tend to rise. - Correlations – increasing risk unknowinglyRisk management ensures that positively correlated trading instruments are discarded. This should always be boring in mind when trading correlated instruments.
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