Trading Blog

The Proper Way Of Risk Management!

LIM WEI XIANG

Apr 5, 2024 — 2 min read

With proper risk management, you will win in the long run!

TL;DR

Understand how much you can lose.
Always use a stop-loss order.
Position/Trading Size
Adapt and Improve Strategy
Consistency and Discipline

Disclaimer: I am not a financial advisor. The content for this article is purely for educational/research purposes only and is merely based on my personal opinions.

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Trading in financial markets can be a rewarding endeavour, but it also comes with its fair share of risks. To navigate these risks successfully and protect your capital, it’s essential to have a robust risk management strategy in place. Let’s explore some key principles and best practices that I personally used to effectively manage risk in trading.

Understand Your Risk Tolerance

Before you start trading, it’s crucial to understand your risk tolerance. This is the amount of risk you are willing to lose if your trading goes south. The amount you are willing to risk will influence your position sizing and trade selection.

In a prop firm, determining risk tolerance is crucial, as it is based on daily loss and maximum loss limits. With The5ers prop firm, I maintain a relatively small risk tolerance. This approach enables me to stay in the trading game for a longer period, facilitating more trades and enhancing my overall trading experience.

Use Stop Loss Orders

Stop-loss orders are a critical tool in risk management. They allow you to specify a price at which your trade will be automatically closed if the market moves against you, limiting your potential losses. Always use stop losses to protect your capital. Always use a stop loss order, knowing when to stop is the first step to become profitable!

Position Sizing

Proper position sizing is essential for managing risk. A common rule of thumb is to risk no more than 0.5% to 1% of your trading capital on any single trade. This ensures that a series of losing trades won’t significantly deplete your account. I wrote an article on position size, take a read here[link]

Review and Adjust

Regularly review your trading performance and risk management strategy. If you find that your risk tolerance has changed or that certain strategies are not working, be prepared to adjust your approach accordingly. I constantly review my trades and always on the lookout to improve my trading strategy to maximise my total return.

Emotional Discipline

Emotions can cloud your judgment and lead to impulsive decisions. Maintain emotional discipline and stick to your risk management plan, even in the face of market fluctuations. My entire trading strategy heavily revolves around this theory, having mechanical and consistency strategy will eventually become profitable in the long run!

Endnote

In conclusion, effective risk management is essential for long-term trading success. By understanding your risk tolerance, using stop losses, diversifying your portfolio, and employing other best practices, you can protect your capital and increase your chances of success in the markets.