Two vital ways to manage your trading risk
Managing the downside when trading
is your best way of ensuring that you don’t decimate your trading account.
So what’s the best way to manage your money when you trade? It all boils down to the risk you take on…
Follow a risk/reward strategy
All good traders have a trading strategy. A trading strategy tells you when to enter and exit trades. If your indicators aren’t telling you to trade, don’t.
You want your trading strategy to give you a risk/reward ratio of 1:2. Essentially this means that your take profit level is twice what you’re risking with your stop loss.
If you stick to this type of risk/reward ratio, you can still make money trading with a 40% success rate.
Keep your positions small
Don’t put on huge trades. The risks are just too high. Only put a very small portion of your trading pot into each trade.
For example, use the 2% rule. This means that you only ever risk 2% of your trading account on one trade.
By risking a small portion of your trading capital, you can endure a run of losing trades and keep trading.
These two money management strategies are vital to trading success and longevity.
How managing your money actually works when you trade
Let’s run through an example of how this works…
Say you’re forex trading with spread trading. Before you start trading, know how much you have in your trading account and work out how much a 2% position is.
Let’s say you have R1,000 in your spread trading account. 2% of that is R20. That’s what you risk on each trade.
If the minimum trade size is R1 per pip, your stop loss is 20 pips (R20).
So there you have it, how not to take gambles with your trading account.
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