11 min read

The risk management approach used by the trader can determine the overall outcome of a trading session. In this blog, we often point out that this is extremely important and that traders should think about it before entering the market. However, what specific steps can an operator take to develop an effective risk management strategy? There are eight ways to deal with losses, and each step can bring a trader one step closer to a thoughtful and more responsible way of trading.

1. Choose the capital management approach

There are two ways to manage your capital: the conservative approach for conservative traders and the slightly more aggressive approach for those with experience. Whatever the trader's choice, the most important thing is to stick to it, no matter what.

The prudent method involves an investment of no more than 1% of the trader's balance in a single transaction and the use of a maximum of 3% of the total balance at a time. This means, for example, that the trader can only have three transactions open at a time and that the total investment amount for each of them must not exceed 3% of the account balance. This method may be preferred by novice traders because it requires less funds for trading.

For example, if the trader's total balance is $ 100, he can only trade with 3% of that amount at a time, which is $ 3, and he can open 3 trades with an investment amount of $ 1. each.

A more aggressive method suggests investing up to 5% in a transaction and not using more than 15% of the balance at a time. This can allow the trader to open 3 trades, for example, with a 5% investment at a time. This method can be used by more experienced traders who are familiar with their preferred trading strategies and assets. That said, traders should diversify their risks so that their potential losses do not exceed 5%.

2. Diversification of assets

Choosing only one or two assets and only trading in them can be very risky: the market can be unpredictable and opening multiple transactions in the same asset can lead to unnecessary losses. Experienced traders choose at least 4 or 5 assets, preferably on different instruments (e.g. stocks and forex, cryptocurrency and ETFs) that are available at different times, so trading conditions differ slightly . This diversification of the trader's portfolio can allow him to manage losses and risks that may arise.

3. Find the right entry point

While there is no way to be 100% sure of closing a deal, there are ways to determine better opportunities. This includes using technical indicators, monitoring news and relying on data received rather than intuition. Entries should be executed with risk management in mind – it may be easier to protect the initial capital than to lose it and try to gain a new one.

4. Trade for the long term

Indicators are extremely useful, but they don't always give perfect signals. They can be particularly misleading over very short periods of time (unless they are specifically designed for short-term trading). This is why novice traders should stick to trading over a longer period of time. Short-term trading is much riskier: traders often neglect the proper analytical tools and rely on their intuition, which unfortunately results in losses. Aiming for the long term allows you to develop a strategy and better analyze the asset. Nevertheless, the trading periods used always depend on the trader's preferred methodologies.

5. The cover

The hedging technique is useful for those trying to manage risk. Hedging involves opening a reverse position in the same asset to protect capital in the event that the asset's price goes in the wrong direction. For example, the trader can open “buy” and “sell” positions on the same asset in order to guard against a possible incorrect forecast.

Hedging can help manage losses, but it can also work against the trader by reducing their potential positive outcome.. This method might be more suitable for experienced traders, as it requires some practice.

6. Trading limit

Experienced traders follow a number of rules when it comes to making daily trades. One of the most important is setting a limit for the number of trades in a day, or a limit for the number of unsuccessful trades in a row.. This limit can be a lifeline when the trader is exhausted and begins to give in to emotions. A break between trading sessions is necessary to deal with the psychological factors that can really hurt trading. This can allow the trader to collect his thoughts, release the tension, and mentally prepare to trade again later.

7. Analyze errors

According to statistics, 95% of traders do not analyze their performance and do not keep track of their trades. This means that they do not recognize their mistakes and, therefore, cannot correct them. Keeping track of all investments, their results and their outcome is absolutely necessary for an effective business approach. Otherwise, the trader is doomed to repeat the same erroneous pattern over and over again.

8. Regular withdrawal of profits

Every week or every month (depending on the trader's preference) it is important to withdraw a portion of the profit (30-50%) in order to feel accomplished and see the results. Even if the amounts are not very large, it will keep the trader from getting discouraged and help him focus on the important part of trading, which is producing a profit.

These 8 tips are most effective when combined and used together as part of a well-balanced strategy. A careful and thoughtful approach is important for those who want to improve their trading routine and see results over time.

To the platform

Source: IQOption blog (blog.iqoption.com) 2020-10-16 08:01:21
Article has been translated for informational and promotional purposes. Translations may not be correct and may contain errors we are not responsible for. Please note this article has been translated by using artificial intelligence. If you are having problems to understand article please refer to original article from IQOption blog.