Long-term trading ultimately requires losses and no trader will always have 100% winning trades. OctagonTrade Presents How to do Risk management in trading?
Find the right balance
The size of your potential losses must be meaningful in comparison to the initial profit potential of each new position in order to be profitable as a trader. It’s simple to slip into the pit of holding losing positions for too long without a controlled attitude towards risk and reward. If your original aim was to make a small profit within a few hours, hoping things could improve before you end up closing for a major loss does not make sense.
It is possible to characterize long-term trading benefit as a winning combination of:
- The number of profitable trades, as opposed to the number of trades that are lost and
- The average value of each trade ‘s gains relative to the average value of the losses
Combining these ratios and the relationship between risk and reward is significant. Many successful traders, for instance, probably have more losing trades than winning trades, but they make money because each loss is much smaller in average size than their average profit. Others, compared to losses, have a modest average net benefit, but a relatively high proportion of winning positions.
Why risk management is important
In the short to medium term, experienced traders know that even strategies that have been effective over the long term will put you at risk, including:
- Big sequence of consecutive defeats
- Occasional significant losses in which rates deviate from levels of stop loss, such as due to a major news event
- Changes in business conditions, which means that you can never be sure that it will continue to succeed in the future only because a strategy worked in the past.
Without proper risk control, incidents such as this may contribute to:
- Loss of one or more economic resources
- Excessive losses in view of your general financial condition
- Having to close positions at the wrong moment in your account because you do not have enough resources to cover the margin.
- The need for an extended period of profitable and cautious trading only to recover your losses and regain the original level of your trading resources. Of course, even when using the required risk management techniques, there is still a chance that the above situations will occur. Just to recover what you have lost, losing more than 30 percent of your account will lead to a big challenge. Some traders turn to taking even greater risks after major losses, which can lead to even greater difficulties.
- You need to be able to keep trading in order to benefit from a winning strategy over the long term. The inevitable big market change or a series of short-term losses will halt your trading with bad risk management. As a trader, you cannot escape risk, but to make money, you have to conserve resources.
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