7 Principles for Risk Management

Currently, the internet is full of a lot of technical analysis courses, investment strategies and all kind of traders showing how good can be their entry points and targets. However, there is a key factor that differences a good analyst and a real profitable trader, and this is Risk Management.

Here we have compelled the 7 principles you need to know, follow and implement in order to achieve your trading goals.

  1. The 2% rule. Many trading gurus or famous writers have recommended over the years to establish a maximum risk per trade of 2%. This means not to take a risk of each trade superior of 2%, however, depending on your type of trading meaning if you are a scalper, day trader or swing trader, this risk could be lower, but never higher.
  2. Predefine the risk of every trade. Before entering a position you must know how much you are risking per trade. Therefore, you won’t go in a position without a Stop Loss. Even if you are a swing or core trader, is necessary to have a Stop Loss, preventing huge losses causes by fundamental news or price´s crash.
  3. Never move your stop loss against your position. When the price is going against the trade, your mind will start to show you why you have to hold that trade for a while and push you to move lower/higher the Stop Loss so you don’t get out of the position. This is one of the common mistakes because even though you haven’t risk the 2% in this trade, you already predefine the risk and if you move your Stop Loss will be strictly emotionally and subjectable. This happens because before you enter in the position you see the marker clearer but know you just look a way to have a winning trade.
  4. Set how many negative trades you allow each day/week/month. As well as you stablish a % risk max per trade (2% E.g.) is important to set how many consecutive losses you can handle. This is needed in order to keep you out of a massive consecutive losing trades and to cut the bleeding of your account.

E.g. 2 losing trades daily (day trader) or 5 consecutive losses weekly.

5. Go back to simulation mode when you reach your losses. If you already lose 2 trades in the current session (if your trading plans says that) don’t trade more with real money. Daily this would happen and then many trading opportunities according to your plan will start to happen, is even possible that you go in a position with your demo account and the trade become winner, but as we said in principle #3 after these losses keep your trading rational and no emotional will be complicated and your account  balance could be a risk anytime.

6. Don’t move your Take profit/target against your position. Just as the Stop loss. Remember this, must of the time your thoughts will be objective before taking any position, so the best thing you can do when you are in the market is accepting the risk and wait for the profit to be reached. (Douglas, 2000).

7. Never trade emotionally. Identified this would be hard at the beginning, but eventually, you will know yourself more and more, identifying when you are under strong emotions that don’t allow you to be clear. Psicotrading and emotional intelligence would be the key to master this last principle.

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