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Implement the right risk management model to ensure your trading portfolio survives and prospers...

by , 19 February 2013

Risk management contributes 90% to your trading success, says professional forex trader, Gavin Fourie. It's also essential to ensuring you don't lose your shirt (and more) when you make a losing trade. Here are the two crucial risk management factors you need to consider before you place any trade.
Risk management is an essential but often overlooked prerequisite to successful active trading,” explains an article on Investopedia.

“After all, a trader that has generated substantial profits over his or her lifetime can lose it all in just one or two bad trades if proper risk management isn’t employed,” the article continues.

But if you apply risk management correctly, you’ll be able to limit losses and keep trading for longer.

Here’s why…

Revealed: The professional risk management secret you should be using in your trading strategy

Professional traders use a method of risk management called the percentage risk method, and you should follow suit.

“The percentage risk method aims to ‘risk’ the same percentage of your trading account (not the same trade size) per trade,” explains Fourie.

To use this method, all you need to know is the percentage risk (of your unleveraged trading account) you’re prepared to risk per trade.

That’s it…

How does the percentage risk method work?

“Let’s say, you’ve chosen a percentage risk of 2% of your trading account,” says Fourie.

“If you start with R20,000 you’d only want to risk 2% of R20,000 per trade, which is R400. So with every trade, the maximum you’d lose (assuming no gapping or slippage) would be R400.” Once you set up your trade, you’ll then set your stop loss at the level that ensures your trading loss is no more than R400 (2% of your trading account) if the trade goes against you.

“If your very first trade is a loser, your account would now be R19,600. So now you’d only risk 2% of R19,600 (R392),” continues Fourie.

The same applies if your trading account increases. You’ll up your trade sizes (still working with 2% of your trading account) so you can risk more money and make potentially larger gains profit.

Bottom line: Trading on the stock market can be a risky venture – but that doesn’t mean it can’t be profitable. By using a risk management model such as the percentage risk method, you can control the down side risk of trading and give yourself a chance to trade again if a trade goes against you.

Implement the right risk management model to ensure your trading portfolio survives and prospers...
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