Whether you’re trading with your own capital or conducting transactions on behalf of a prop company, you should be aware that risk management is a crucial factor you should take into consideration.
Although essential, many overlook it and don’t care about it as much as they should. Every trader, even professional ones, must adhere to a risk management strategy to maximize their profit and avoid losing money instead of earning it.
In the following blog post, we’re going to cover every aspect of this subject and provide you with approaches to reduce risks as much as possible.
Let’s get into action and explore why this factor is so important.
Why is Risk Management in Trading Very Important?
Losing money is an unrepeatable part of a trading career. Even most professionals in the game may face losses, and it’s almost impossible all the trades they get into lead to generating yield.
The art here is to minimize the harmful effects of the losses so the overall status stays in the positive area, which can be done by proper risk management.
Risk management is the factor that determines whether a trader is successful or a failure. It somehow differentiates trading from gambling, which is entirely distinct from it.
It’s obvious the more risks, the more reward or profit, to be exact, you’ll gain. But there is a dark side you should be aware of. When the risk is high, the amount of money you may lose is much more.
A gambler relies on their luck and wishes to win more no matter how high the risk. On the other hand, counting on luck when trading is so unprofessional. Trading is a process that the one involved must do rationally and try to minimize the possible loss as much as possible.
Here risk management enters intending to reduce risks, as the name of the factor suggests.
It’s a crucial factor in the traders’ world because it ensures that even on bad days or more extended periods, an account’s overall status remains positive as the trader manages to mitigate risks with clear and helpful strategies.
The ones neglecting risk management in their trades often face disastrous losses. For example, they may lose all their capital in a single trade which is highly amateurish.
So all traders, regardless of which market they are playing in, whether they are prop traders or individuals using their own money with the hope of making it more, must pay special attention to risk management strategies.
In the next section, we’ll give you tips on how you can manage and reduce risks in your trade.
read more: How to Get into Prop Trading? (7 Steps Guide)
5 Risk Mitigation Strategies All the Traders Can Adhere
All traders must employ different risk management strategies, regardless of their trading markets.
This is especially important for prop traders as they need to demonstrate their value to prop firms in order to maintain a working relationship.
However, the approaches you’re going to read below will benefit all kinds of traders, even individuals who are investing their own capital.
There are several ways to do this, but these 5 strategies are the best.
1.Keep the Emotion Out of the Way
Casinos in Las Vegas and all around the globe make a ton of money from the gamblers’ emotions.
When gamblers win money, they get greedy and are willing to invest more to earn more. But usually, everything gets out of hand, and they lose everything, even what they made earlier.
Traders are not gamblers, remember? The trader must avoid deciding emotionally to reduce the risks on the path.
Greediness has no place in a trading process and may cause huge losses.
It’s vital to bypass trading when you feel tired and are in a bad state of mind. Because in such situations, emotions may enter and make you decide unwisely about the whole process.
Although it’s a challenging matter to consider, it’s imperative.
So, stick to your rational strategy; don’t let your emotions take the wheel.
2.Predetermine Stop-loss and Take-profit Points
How much of your capital are you OK to lose? As it’s not guaranteed that the market will move in your favor, you must be ready to lose the trade and witness some of your money get lost.
In such cases, you should know your exit point before opening a position.
Moreover, you should know when to withdraw your money after gaining a predetermined profit.
Almost all brokers offer stop-loss and take-profit services.
With stop-loss, you can specify when to sell automatically when the market is moving in the opposite direction of your prediction to minimize the loss.
While the take-profit will sell the asset when gaining your favored profit automatically.
This way, you avoid emotions in your trading and use reason.
It is one of the most critical tactics for risk management that all traders should obey.
Also, trailing stop-loss service will move the stop-loss point when the market is going in the predicted direction, maintaining distance between two points you can utilize.
You can take advantage of different options to find the right spots for exiting the trade—indicators alongside support and resistance lines.
3.Follow the 1% Rule
Another valuable strategy for risk management is the 1% rule which most proficient traders use. If you wish to be a profitable trader, employ it to manage the risks and preserve a positive balance.
It simply says you shouldn’t invest more than 1 percent of your funds in a single trade! At most, 5% of the capital must be involved across all the open positions.
Thanks to this approach, recovery, and overweighing losses won’t be tough even if the whole month goes wrong for the trader.
You must invest the money you don’t need. Otherwise, you involve emotions in your decisions, which we said earlier is prohibited.
Consider that you can be a profitable trader with proper risk management strategies, even if half your trades result in losses.
So listen to advice from experienced ones; just invest 1% of your capital and stay rational.
4.Measure and Monitor all Possible Risks Across All Trades
Before opening a position, nonetheless the market, you should be aware of all the potential risks on the way.
Measuring and monitoring risks is crucial for any risk management strategy.
Comprehensive knowledge in this area helps you make better decisions and minimize losses. The more you know about the possible risks that may occur in a market, the more you can do to mitigate troubles and maintain a positive balance.
We strongly advise you to have a keen eye for news. When the market makers are going to give a speech, their words are able to move the market in unpredictable directions. The best thing to do is avoid trading and having open positions when a piece of important news about the market is going to release.
Besides news, follow influential individuals on Twitter. As this social media is an essential player in financial markets, a single tweet can make a huge difference.
read more: How do you get capital for trading?
5.Diversify Your Portfolio With the Least Correlated Assets
Related assets usually move just like each other. Take currency pairs, for example.
USD/EUR and USD/GPB are two common currency pairs. When the chart of the former goes up, the latter likely increases as well. When the markets are moving in the direction you’ve predicted, having both these currency pairs in your portfolio is beneficial, as you’ll profit from both.
But what about the times that you were wrong with your forecasts? Well, there will be a considerable loss.
As we mentioned earlier, high risks can lead to high rewards, but conversely, if things go awry, the trader faces a severe punishment by losing a tremendous amount of capital.
That’s why having a diverse portfolio is helpful when it comes to risk management in trading.
Taking this approach, if the trade on a specific asset results in a loss, it’s possible to cover it with the yield you’ve generated on other assets.
Don’t forget that the primary purpose of risk management is minimizing risks and losses.
As this is a blog on a prop trading website, let us promote our services in the conclusion part.
Propiy Provides Capital for Experience Traders
Don’t worry if you are short of capital to invest in the financial markets. As long as you’re an experienced trader with a proven profitable strategy, we’ll provide you with money to trade with.
We cover professional traders who care about risk management, in various ways, including two-phase challenges and the fast route called JetJump.
If you qualify, we’ll fund you to trade on our behalf, and the profit you earn will be split according to predetermined conditions.
For more information, visit Terms&Condition and JetJump Pages.
