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Why you must address risk management BEFORE trading

by , 09 June 2015

If you're new to trading, it's easy to let the excitement of making mouth-watering profits from your new venture stand in the way of dealing with vital aspects of your strategy.

But before you even contemplate putting a trade on, you must realise the importance of risk management and make it a major part of your strategy.

So why is risk management so important when you trade? And how can you make trading work for you?

Read on to find out…

Why risk management is vital to successful trading

The major premise behind risk management is to limit your losses from trading.

Your strategy needs to include a way of setting your trades up so that you limit your potential losses. This means a few bad trades can’t wipe out your entire trading pot.

The sad fact is, so many new traders focus entirely on their potential profits and not their potential losses. A number of different studies have shown that between 80% and 90% of traders lose money.

How to avoid major trading losses

The first thing to bear in mind when you begin trading is that you’re on a learning curve. It’s going to take you some time to get to grips with everything.

But there are things you can do to stack the odds in your favour…

You need to ensure you understand and use basic principles, such as:

  • Stop losses: Setting a stop loss when you enter a trade protects you against the trade not working out as you envisaged.
  • Position sizing: Only putting a small percentage of your trading capital into each trade.

Bottom line: If you want to be a successful trader over the long run, you need to take time to address the essential aspects of risk management first. Otherwise you risk losing all of your trading pot.

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Why you must address risk management BEFORE trading
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