90% of traders lose 90% of their money in the first 90 days of trading. Sounds cliche? Definitely not. This isn’t a coincidence, it’s a statement backed by data from ‘brokers’. The majority of new traders with a new trading account lose almost all of their money within 90 days of trading a live account.
What separates a consistently profitable trader from a struggling trader? The answer is a very powerful MONEY MANAGEMENT SKILL & SOLID TRADING PSYCHOLOGY. Right! You can have it too.
“I’m always thinking about losing money as opposed to making money. Don’t focus on making money, focus on protecting what you have.”
— Paul Tudor Jones
Most newbie traders wonder ‘why?’ or probably get bored when successful traders emphasize the importance of managing risk in the trading business. They probably have learned the hard way. This is why they are emphasizing its significance.
Remember this: Risk management can make or break you
Quick Note: For clarity and understanding, RISK MANAGEMENT can also be termed MONEY MANAGEMENT. It is important to make you know it’s the same as a newbie reading this for the first time.
You would understand what Risk Management is.
The importance of Risk Management in trading.
How you can use risk management to go from zero to a hero as the successful traders do.
How to take calculated risks and set yourself up for success.
Why risk management is the most important aspect of trading.
Mistakes to avoid.
Having an edge in the forex market.
Risk Management / Money Management.
Strategy (entry and exit criteria).
Risk management is the most important aspect of trading because risk management will make or break you in the trading business. A proper risk management skill will make you rich long term. Successful traders are risk managers first before they become traders. Their goal is to manage risk by making sure they don’t over-trade, over-leverage, or over-risk before they look forward to making money in the market.
Many focus on technical analysis, most beginner traders, seeking the holy grail strategy that doesn’t exist, reading books on technicals looking for that perfect strategy that eliminates loss completely. Nothing like that exists.
One of the most important topics in forex trading is risk management. Why? Well, you are in the forex business to make money. And, to make money, you have to learn how to take acceptable losses and manage risk in the live market.
Unfortunately, this is one of the most neglected lessons in all of forex trading. In many cases, traders are just too excited to get started and completely disregard their account size! This is a major mistake and one that can be detrimental to not only your trading capital but your trading journey as a whole.
Risk management can be defined as a set of rules and measures you can put in place to ensure that the impact of being wrong is manageable.
Forex trading is a numbers game and it’s one of the riskiest businesses on earth. Yes, you have to understand the risk involved before deciding to go all in. You have to have rules that put probability in your favor in the long run. The good news is risk management strategies can help you eliminate the chance of financial ruin while pursuing reward in the market.
Without a solid core foundation, a building tends to collapse.
Here at Global Institute of Trading, our goal is to make the foundation for our readers/traders so solid it deploys them to potential obstacles in the trading industry and sets them up for success long term. Having a good foundation matters in trading, having a deep knowledge of the basics of forex trading is crucial for success in this industry. This post is about one of the most important aspects of forex trading.
An edge is a trading system that puts probability in your favour over a series of trades, basically anything you do from spotting a trade opportunity to managing risks and having the right psychology that guarantees you success in the trading industry in the long run.
Continuously recall, you need to be a part of the 1%, not a Gambler. For a long time, it is generally better to be a steady winner and have a shot at joining the 1%.
Every good forex trading plan has a set of risk management rules. These rules outline the parameters for the following:
Maximum Loss Percentage Per Trade:
The maximum loss on a given trade is defined before opening a position. You shouldn’t lose more than 1-2% on any given trade.
The position size is defined by the trading plan. It is crucial to understand that margin carries significant risk; that is why precision is necessary when determining how many lots to buy or sell at a given time.
Risk Vs Reward:
The placement of stop loss and profit target orders is a key aspect of risk management. Each must be aligned relative to the current market price, acceptable per trade loss, and applied leverage. If done greatly even the most erratic market moves will have a minimal impact on the trading account balance.
At the end of the day, it doesn’t matter if you use technical analysis or fundamentals to spot trading opportunities. What matters is Consistency. Consistency is the keyword here.
Consistency is essential. Without it, you are prone to repeat the same costly mistakes over and over. Not even the best trading platform on the planet can make up for the cost of inconsistent trading!
The buying and selling of currency pairs is not an easy task. Having a concrete strategy that governs market entry/exit, position management, and risk management is the key to being a consistently profitable forex trader.
How? You may ask.
The solution is to have a well-structured trading plan and then follow it religiously without deviation.
The following lists are common mistakes new traders make that are detrimental to their trading account, you should avoid them. These include;
Not having a trading plan;
Not understanding the importance of having a good risk management skills
Risking more than 1-2% of their a trading account
ncreasing stop loss due to fear of being taken out
Taking profits too early
FOMO ( means fear of missing out)
Holding on to a winning trade for too without taking profits.
“The elements of good trading are (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.”
— Ed Seykota
“I don’t think you can consistently be a winning trader if you’re banking on being right more than 50 per cent of the time. You have to figure out how to make money being right only 20 to 30 per cent of the time.”
— Bill Lipschutz
“Throughout my financial career, I have continually witnessed examples of other people that I have known being ruined by a failure to respect risk. If you don’t take a hard look at risk, it will take you.”
— Larry Hite
Risk management will make your stay long enough in the market. It is referred to as Survival of the Fittest.
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