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There’s no sugarcoating it – risk is part and parcel of trading. No one, whether relying on luck or experience, can escape the gamble. Hence, the finest traders learn to manage it for profitable outcomes.
This article concisely examines the best risk management strategies and shares two highly recommended tools to boost your results today.
2. Essential Risk Management Strategies in Trading
You can spend several hours building entry & exit strategies, reviewing brokers, assessing indicators, backtesting & forward-testing. Unfortunately, you’ll hardly thrive in this game without a solid risk management plan.
It helps to control potential losses enough to remain profitable long-term, which is every trader’s ultimate goal.
Frankly, it’s more common to discover a mediocre price analyst growing one’s equity impressively with proper risk management than the reverse.
Thus, consider the following techniques for the fastest and most sustainable result:
2.1 Exploiting Stop-Loss and Take-Profit Orders
It’s simple. Stop orders prevent open positions from continued drawdowns that could trigger the margin call and stop-out levels.
They ensure any trade placed can’t and shouldn’t cause a total loss of trading capital. Hence, it’s alarming that some traders don’t exploit it due to fear, overconfidence, cynical beliefs, etc.
The perfect stop level depends on your risk tolerance, account size, and broker, among several factors, but Investopedia discusses this in more detail.
Similarly, having and setting a profit target secures gains before possible drawdowns. They are just as essential as stop orders because you’ll always exit trades in your favor (many times increasing your account size).
2.2 Calculating The Ideal Position Sizing
Leveraging has become the chief facilitator of retail trading today. Traders with far less capital than required can engage in financial markets with respectable position sizes.
As alluring as it sounds, the privilege comes with one major setback – magnifying potential losses during drawdowns. Therefore, traders must actively control their position sizing to manage the inherent risk associated with this business.
You specify it as the “lot size” or “units” while opening positions on most trading platforms.
Again, there is no hard and fast rule regarding the most favorable position size for risk management. However, a general practice is to divide one’s account risk by the trade size.
Traders can also employ online calculators for fast and accurate values.
2.3 Understanding and Implementing Risk-Reward Ratios
Trading with risk-reward ratios can be a massive game changer for any trader. It is the amount you’re content with losing for an amount you could gain per trade.
For instance, if you adhere to the highly-promoted 1:3 risk-reward ratio, you’re happy to lose $10 when you could’ve gained $30 on any position. To rephrase, you are only after opportunities that can yield $300 by only risking $100.
Stop-loss and take-profit orders, discussed earlier, will ensure every trade respects this ratio.
Imagine you strictly adopted the 1:3 ratio on twenty trading opportunities in live conditions. You can lose 14 such trades, win the others, and still boast a $400 net profit.
2.4 Staying Informed About Your Preferred Markets
“Knowledge is power,” even in the trading world. Thus, understanding the bolts and nuts of your preferred financial assets for better risk management is more valuable than many realize
In the end, real-life factors are behind every move in the markets. Hence, anticipating them will reveal the most and least risky periods to trade.
Approaching geopolitical events may signal high volatility. Earnings reports could disclose long-term industry growth. Natural disasters might influence price falls.
The news is the most complete and reliable source for keeping informed, but economic calendars, industry reports, social media, and many others are also available.
3. Managing Risk Like a Pro With the Best Trading Companions
The fundamental of building wealth in trading is by avoiding significant losses.
That’s all risk management is about.
Protect the capital as you look to expand it steadily, long- or short-term.
If you’re still struggling with the basics, such as implementing stop or take-profit orders, Indicator Vault’s technical tools for TradingView are the perfect companions for you.
Here are a few of several benefits every user enjoys:
- Knowledge of the most respected stop-loss placement level for every trade
- Guidance on where to set take profit orders for maximum returns
- Understanding the highest-probability reversal trading signals on any market across all timeframes
- Assurance of never missing promising opportunities, thanks to instant alerts from within and outside the trading platform
Sounds unreal? Click here and confirm for yourself today.
Another recommended choice for the best stop-loss and take-profit suggestions is the Natural Momentum for TradingView. Its algorithm is one of the most complex but reliable.
In a nutshell, below are some of its all-round perks:
- Assured awareness of the most favorable chart levels for stop-loss and take-profit placements
- Earliest knowledge of potential price reversals
- Freedom to trade in any market or timeframe desired
- Fast TradingView and email alerts to ensure users are always on time to exploit inviting opportunities
Get the indicator here now, sit back, and watch your equity grow exponentially.
Risk management is (arguably) the most essential skill every trader must possess. It involves minimizing losses enough to allow your wins to grow your account size.
Please share this article with friends, colleagues, and any aspiring trader on social media to understand this critical topic that determines their long-term success.
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