Risk management may sound boring, but it’s vital to being profitable… Here’s what you should do

Julie Brownlee, Fsp Invest, 27 Feb. 2015

Tags: trading, risk management, trading strategy, money management, risk, risk management strategy,



If you don’t manage your risks when you trade, chances are you’re going to lose money.

You can’t trade based on a hunch. You must follow a strategy, have a target price and a stop loss.

So how should you manage your money when you trade?

Read on to find out…



Sound risk management comes down to protecting your capital


Protecting your trading capital is how you live to trade another day. This means you don’t have to get every trade spot on. And it means your losses don’t bring your trading journey to an abrupt end.

This is crucial, even if you have a top trading strategy to follow. If you don’t manage your risk and money, a few bad trades can take you out of the game.


Manage your risk with position sizing


One sure way to manage your risk is to only risk 2% of your trading capital on each trade. That means even if you have a bad run of ten losing trades, your trading pot would only be down 20%.

Being down is never a good thing. But if you risked 10% on each trade, ten losing trades would mean the end of the road.

You might find this hard to do depending on your trading capital and the type of instrument you use.

If you have a small trading pot to start with, spread trading may be a good option for you as you can start trading by risking just R1 a point.


Stick to a risk reward ratio


You also want to consider the reward side when you trade.

Aim for a 1:2 risk reward ratio. So when you put a trade on, you might risk R1,000 (where your stop loss is), but your profit target is R2,000.

This gives you a reward that is twice your risk. And you shouldn’t put a trade on unless your trading strategy indicates this is a possibility.

By sticking to a 2:1 risk to reward ratio, it means you only have to be right 34% of the time to break even.

So there you have it, how to use risk management to become a profitable trader.

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