Properly managing risk while trading online is perhaps one of the most critical tasks of traders these days. Markets are unpredictable, and even if you think you have a solid trading system, accuracy is far from being guaranteed.
Unfortunately, many traders fail to understand this principle in their early stages. They settle for a few technical analysis rules, proceed to an MT4 download and start to trade right away. Although live trading is a formative way of learning how to spot opportunities, it is without a doubt better to first understand several subtle details dealing with risk management.
Risk/reward ratio
Stop losses are a safety measure that traders should use on every trade, in order to keep the downside limited. At the same time, you should have an idea of where the potential target (take profit level) is, even though this figure can change, depending on market dynamics.
An important risk management metric is risk/reward, a ratio that gives a picture of the return achieved, in the context of the potential risk taken. It’s a good rule of thumb to always try to aim for targets that are wider, when compared to the stop loss.
In such a situation, when the markets do not go as expected you will only lose a fraction. At the time of writing, traders are heavily involved in stock trading. This market is characterized by “mysterious strength”, despite multiple uncertainties like high inflation, a global shortage of commodities, waning fiscal stimulus, and monetary policy normalization.
It has been a challenging year for stocks, with Q1 ending in the red. Traders have the difficult task of finding setups that can provide generous returns, while also keeping risk limited.
Trade frequency
How many traders keep track of their number of executed trades per day, week, or month? Is there a correlation between their performance and their trade frequency? Statistically speaking, more trades mean a higher probability to make mistakes.
As a result, it is important to filter out potential trade setups. There is no fixed number of trades that one should make, since the amount of time you spend in front of the charts is an important factor here. Setups that form during highly liquid periods (such as FTSE and NYSE opening hours), as well as when there is major news flooding the markets, are recommended in that sense.
A golden rule is that when the prices are choppy, inconsistency is more likely. As part of your risk management rules, make sure you have at least an estimated maximum number of trades for any given period.
Favored asset list
Opportunities arise in stocks, commodities, and currencies, all of which are volatile asset classes. However, each is characterized by particular behavior, and only with an in-depth understanding of if can one truly leverage all the benefits.
Instead of trading what’s popular each day, determine a list of assets that are your focus constantly. Once you get accustomed to your routine, it’s possible to expand the list, but only after an initial research has been conducted.
