For diligent traders, risk management is a highly effective practice; For gifted traders, risk management practices are also valuable. Risk management enables traders to grasp economic trends while reducing the risk of significant losses from trading.
When the value of your hard-earned money is affected by inflation, Exness provides you with a way to both preserve and increase its value. Under the turbulent global economic wave, online trading has become a beacon guiding savvy investors forward. However, if you want to achieve better trading performance, you not only need to use the right tools, but also have the wisdom to use them. On the path of pursuing excellent trading performance, risk management is your reliable ally.
Learning to control position size can ensure that you do not face excessive risks in trading. The method for savvy traders to manage potential losses in pursuit of maximum returns is to control the size of their positions. Controlling position size refers to determining the trading volume of a transaction. You need to determine the size of your position based on the specific risk you can bear during each transaction, rather than adopting a one size fits all approach.
Assuming your trading account has $1000. You have adopted a 1% risk management plan, which means that for every transaction you make, you have to bear a risk of losing $10. If a stop loss is triggered, this position size can ensure that you will only lose $10, which is 1% of your account funds, thereby protecting your funds from significant shrinkage.
The size of a position is not only about minimizing risk, but also about increasing profit potential. Whether trading stocks, foreign exchange, or any other asset, by adjusting the trading scale to an appropriate level, you can control the risk of your investment portfolio during market fluctuations. This method can help you resist market turbulence and maintain long-term activity.
If you want to have a good sleep while your order is still outstanding, stop loss (SL) and take profit (TP) are essential "weapons".
Set a stop loss level to automatically exit a position when the price reaches a preset level, minimizing potential losses. If it is stock trading, the stop loss level can be set below the key support level or based on a fixed percentage of the entry price. For foreign exchange trading, the stop loss level can be determined based on the volatility of the currency. We suggest that you refer to the Average Range Indicator (ATR).
Once the profit target is achieved, take profit orders will be automatically sold, locking in the earned profits. One of the popular strategies in stock trading is to aim near historical peaks or set targets within that range. In foreign exchange and commodity trading, it can be set based on key market levels or favorable risk return ratios.
Calculating the optimal positions for take profit and stop loss is very simple. The stop loss point can be set based on a fixed percentage of the investment amount, while the take profit point can be set based on the risk return ratio that matches the strategy, such as 1:2. For example, in forex trading, if you have $10000 and do not want to take more than 1% risk, you can set the stop loss to 50 points at $2 per point. If your take profit point is 100 points away from the price, you may earn a profit of $200.
Based on the unique volatility of the assets you trade, adopting the above practices and keeping in mind that regularly optimizing strategies based on market trends and your personal experience is the key to your continuous improvement.
Risk return ratio is the balance of trading, which compares the losses (risks) you are willing to bear with the returns (returns) you hope to obtain. Risk return ratio is an important indicator that can help traders determine the potential profit size of their positions.
Assuming you have set your sights on a stock currently priced at $50 and predict that it will rise. You can set the stop loss to $45 to prevent the stock price from falling. In that case, your risk of loss is $5. You expect the stock price to rise to $60, with a potential return of $10. In this way, your risk return ratio is 1:2, which means that for every $1 of risk taken, you are expected to receive a potential return of $2.
By controlling the risk return ratio above a favorable level (such as 1:2 or higher) during trading, you can achieve returns greater than losses. Although not all trades will be profitable, those trades with higher potential returns can offset losses and enable the trading strategy to achieve overall profitability.
The risk return ratio is the cornerstone of self disciplined trading, ensuring that your trades are not just based on speculation, but on thoughtful decisions, with calculated risks within an acceptable range. By developing a reliable risk management plan and adopting trading strategies aimed at achieving sustainable development and performance growth, you can confidently enter the market.
As with many trading psychology practices, breaking risk management strategies is very easy. When many traders feel that their analysis seems flawless, they increase the risk level of their trades. Nothing in the market is 100% certain, so don't let passion or confidence influence your trading behavior.
If you violate your own rules during a transaction, please make sure to record this in your transaction log and explain the reason. At the same time, report your trading results after exiting the position. After entering the market several times, you may discover a pattern. If you are one of the lucky traders with exceptional talent, this pattern may make you feel proud. If you're not, then learn from your mistakes and make wiser trades in the future.
