A solid trade scheme helps you increase your account, while risk management ensures your existence in the financial markets. In this article, we will discuss some of the best funds and risk management strategies to reduce the risk and develop our capital efficiently. We will detect techniques to handle open positions and control emotions so that you can redeem high risk-to-inam trades.
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What is money and risk management?
Risk management involves identifying and reducing potential risks, while trade trading focuses on effectively distributing and protecting capital. Both serve the same goal-achieve long-term success by preserving and optimizing profitability.
Imagine the market is in an uptrend. We identify a level of support and a reversal candlestick formation. Based on this, we enter a long position at the close of an engulfing candlestick, place our stop loss below the doji candle, and target twice our risk.
Let’s say our account size is $1,000. Our position size determines what percentage of our capital we will lose if the price hits our stop loss. If we risk 5% of our account ($50) per trade and win only one out of three trades, we will still break even. However, if we lose five trades in a row in a bad trading week, we will lose 25% of our capital—an outcome that can be both frustrating and destructive for future trading decisions.
Blowing an account doesn’t mean losing all of your money; losing half of your capital can be mentally discouraging. This is where money management comes into play. If we risk only 2% of our initial account size per trade, five consecutive losses would only result in a 10% drawdown, which can be easily recovered during profitable trading periods.
Risk Management Techniques:
Managing Losing Trades:
If the price moves against our prediction after entering a trade, we can take action before the stop loss is hit. For example, after a break and close below a key level, we can anticipate further price decline and close half of our position early, saving 25% of our risk amount.
Managing Winning Trades:
When the market moves in our favor, it can still reverse unexpectedly, turning a winning trade into a losing one. One technique is to secure some profits before reaching our final target. By closing part of a position early, we protect our gains and reduce risk.
Basic Rules of Money Management:
1. How Much Should You Risk Per Trade?
This depends on your risk tolerance, which is the amount of money you are comfortable losing on inevitable losing trades. Ask yourself:
What percentage of your capital are you willing to risk per trade?
How much of a total account loss would make you uncomfortable or impact future trading decisions?
By answering these questions, you can create a solid money management plan. Following this plan helps keep emotions in check. If you risk more than you’re willing to lose, emotions will control your trading decisions.
For example, risking 3% of an account per trade means five consecutive losses result in a 15% drawdown. On the other hand, risking too little (e.g., 1%) may not yield satisfying returns, leading to discouragement.
2. Calculating Position Size:
Position size depends on the percentage you are willing to risk, your account size, and the stop-loss distance in pips. A useful tool for this is the position size calculator on MyFXBook.com.
For instance, if we want to trade GBP/CAD with a $2,500 account and risk 2% per trade with a 20-pip stop loss, the calculator will suggest the appropriate lot size to open. This method ensures proper risk management across different trading pairs.
Growing Your Trading Account:
To grow your account safely while controlling emotions, consider these strategies:
Transfer some of your profits to a second account and take higher risks only with those funds.
Withdraw profits regularly to stay motivated.
Avoid attempting to grow an account indefinitely without taking profits, as it may lead to emotional setbacks.
Risk Management Techniques for Open Positions
1. Break-Even Strategy:
Traders use the break-even technique to remove risk from trades. For example, if a trade reaches twice the stop loss distance in profit, closing half the position secures gains. Another approach is opening two smaller positions—one targeting a short-term level and the other a long-term target.
2. Trailing Stop Strategy:
This method allows traders to maximize profits by moving the stop loss as the trade progresses. In an uptrend, every time the market forms a higher low, the stop loss is moved below the most recent swing low. This technique ensures that as long as the trend continues, the profits are stopped while running the business.
Conclusion:
Money and risk management are important for long -term success in the business. By using effective strategies such as position size, braking building technology and gain tracking, traders can reduce losses and make maximum returns. Adjust these principles to fit your trade style and share your insight with other traders.