Whether you’re new to trading or even if you’re already an active trader with several profitable deals under your belt, it’s worthwhile to take stock of how you’re managing risk on a periodic basis. For new traders, you won’t want to blow through your entire trading account before you’ve barely begun getting experience. For active traders, you are probably moving up in the game with a larger trading account and higher trades. With higher volumes and more valuable trades, you might be putting more of your money at risk without realizing it. Successful traders have learned (sometimes the hard way) that profits that have been generated and saved over a period of months or years can quickly be wiped out buy a bad trade or two if you’re not diligent about managing your risk. For instance, you could have wins of 80% – 90% but then, by mishandling losing trades, a large percentage of that money could go out the window. Don’t let that happen to you!
Setting Stop-Loss and Take-Profit Points
There’s no doubt that some of the trades even the most experience traders make, will end up in a loss. The important factor here then is how much of a loss are you willing to take? You can set a stop-loss point that determines or limits the amount of loss allowed on any one trade. Otherwise, you can be tricked into thinking that if you just hang on a bit longer, the tide will turn, and you’ll get your money back. Don’t risk your money by that kind of thinking. As you go into a trade, make it a habit to set a stop-loss. By the same token, learn to set take-profit points as well. That way, instead of staying in a deal too long watching it go up, up, up, you will insure yourself of a nice profit even if the balloon bursts and the price comes crashing down. Of course, you want to earn as much as you can, but if you set your sights too high you could end up losing everything.
Beware of Setting Daily Performance Targets
In other areas of life, it makes some sense to set targets and goals for yourself. You can take control over certain situations and make sure you reach your goals. However, you can’t make that same promise in forex or in any kind of trading. Having set performance targets can lure you into making trades that you should not have made just so you can try to meet your daily or weekly “quota.” In trading, it’s much safer to take a long-term approach to performance and profitability. Trade according to your own trading formula and then track your trades in a journal. Then you can go back and analyze your trades and grade your performance. In this way, you will trade according to your style and not be pressured by meeting short-term goals.
Reduce your risk by limiting your losses and keep on trading!