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Managing Risks is Also as Important as Learning How to Win a Trade

by John Dillans

It is easier to think about how much you want to win than how much you can accept to lose in trading. However, acknowledging how much you are willing to lose because of the risks is one thing and knowing what to do when those risks do come is another. We are all trading because we want to generate revenue, but before we can do that, we should know how to manage every potential risk that can come our way.

Trading should not be like gambling.

If we trade without being prepared and just focused on the wins, we are more gamblers than traders. Having rules when managing risks can help any trader become more profitable. Even casinos know their statistics if you think that gambling is the way to getting rich. If one gambler won, the casino knows that more people will not succeed. Hence, they get richer because they can get back the money they gave to that one gambler who won from the hundreds or thousands who did not, and more. Now, that is risk management on their part. Would you rather be one of the gamblers, or you want to be the casino?

How much should I risk?

There are a lot of factors in trading that can affect the amount of risk we should take. For instance, traders have different experiences, trading systems, and trading plans. However, the recommended figure would be at least 2% or even lower. When we say factors, we are mostly talking about the times it takes a trade. You want to take lesser risks per trade if you take more currency trades for every time frame you look at.

Risks and rewards

There is a term called risk-to-reward ratio, and it basically means that you should only trade when you have the chance to make three times more than what you risk. Hence, this ratio can be usually spelled out as “3:1,” and most people who have experienced using it say that they ended up becoming more profitable as time went by.

However, this risk-to-reward ratio may not always work for everyone. Others opt to use another ratio because of other factors like trading environment, chosen timeframe, entry point, or exit point. For instance, others may use a 9:1 risk-to-reward ratio or even as high as 10:1, while scalpers can go as low as 0.7:1. So, it depends on your trading personality and methods.

What went wrong in your trade?

Like how you would look at your winning trades, you should also study all the factors that made you lose a trade. Here are some things that you can take a closer look at to improve your following trades:

  • Track your performance. Study your previous trades. Assess all your profit and loss data. Find out which factors cause a strain on your performance.
  • Average losses. If you have something you can mostly control, it should be your average losses, so you need to monitor them.
  • What is your trade expectancy? Trade expectancy is the average you can expect to win or lose in every trade, depending on your previous performance. You should always hope for a positive expectancy per trade, but if what’s happening is negative, study your average losses to know the possible breakdown locations. Going back to your performance, it relies a lot on your expectancy.

Is risk reduction management relevant to trading?

As we have said, trading is not supposed to be like gambling. Instead, traders need to know how to manage losses to generate profits better and become better traders.

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