5 Practical Risk Management Tips to Improve Your Trades

5 Practical Risk Management Tips to Improve Your Trades

Risk management is something that many traders often overlook. With the thrill and adrenaline they get, it’s not surprising that risks are often thrown in the rearview mirror.

However, remember that trading is not only for fun and excitement. You can really hype yourself up and traverse the peaks and valleys of the market terra. That’s really fun. But without the proper protection, you can end up losing all those money you invested.

5 Practical risk management tips

 

Risk management is very important. And here are some of the best tips we got for you to improve your risk management better.

See also: Several Types of Investment Risks

 

Start paying attention to risk management

Everything will be much easier when you start really paying attention to risks and risk management.

Most of the time, traders are careful about the risks they may have to suffer. When they first try trading, they’re mostly aware of the dangers. Afraid that they’ll lose their money, they trade unwillingly. That’s not good.

However, once they get the taste of earning something out of a small investment, they always go for the kill. And while there are lots of aggressive traders around, it’s often not advisable to disregard the risks altogether.

There are even some who think their risk management strategies are good enough to see them through. These traders often forget that while their tactics worked many times before, they still have to change it.

It’s like calibrating a machine to perform better as time goes by.

If you can pay attention to risks while trying to earn something big, you can see better options and reap better results.

This rings true to all markets, whether it’s the currency, stock, commodities, real estate, futures, options, or CFDs.

Setting orders and risk-reward ratio

Stop loss and take profit orders are you’re insurance. These orders guarantee that you will not lose more than you’re willing to lose. Also, checking the risk-rewards ratio you require will always pay off.

When you spot a potential entry signal, consider first where you’ve placed your stop loss and take profit orders. This is the very first step you have to take. And you shouldn’t do it the other way around.

If you think that the entry signal falls on the reasonable price levels for the orders, see the risk-reward ratio. You should already have set up a requirement for the ratio. If the trade doesn’t meet your requirement, leave it.

Do not attempt to widen you take profit order and your stop loss order. Also, do not adjust your risk-reward ratio requirement for the sake of that trade. You should always stick to the plan and see it through.

Sticking to the plan doesn’t only teach you discipline, it also secures your positions and profitability.

Meanwhile, remember that the reward of a trade is always uncertain. It’s also highly on the potential side. Therefore, it is only the risk which you can control.

Avoid the common mistake of newbie traders. And that’s coming up with random risk-reward ratio and then adjusting the orders for it.

Read further: Differences Between Fundamental and Technical Analysis

Avoid using daily performance targets

A lot of traders nowadays randomly set daily or weekly performance targets. This kind of approach puts you at risk, too. It goes without saying that you must refrain from this habit.

The reason why it’s a bad habit is that it creates pressure on your part to hit the target. Along with that, it also makes you feel the need to trade—even if there’s really no need to.

Nonetheless, you can set a short-term, mid-term, and long-term goal.

For the short-term, which is usually daily and weekly, you can focus on the best possible trade execution. See how well you can follow your rules or plan.

For the mid-term, which can be weekly and monthly, you have to follow a professional routine. It will definitely be helpful to p0lan your trades in advance. And when you set up rules, you must obey them no matter how tempting it is to diverge. In addition, keep a trading journal where you write all the things you do while trading.

Keeping a trading journal has a lot of benefits, one of them being the ability to review your trades.  Make sure that you review them thoroughly and learn from them and the mistakes you have committed.

For the longer-term, which is usually semiannually, reviewing your trades is a must. You can shift your focus on the way you executed your trades.  Doing so will help you gauge the level of your professionalism.

This is also a time when you can find weaknesses in your trading, giving you the chance to adjust it. if you can do this well, it can ensure a good level of profitability.

Security correlations

If you’ve been trading forex for some time, you may have observed that certain forex pairs have correlations. For the case of stocks, you may have noticed that companies in the same sector or industry often move together.

There are three general ways in which two currencies or stocks are correlated. A rise in one currency or stock may mean a similar rise in the other. A fall in one may mean a fall in the other. Sometimes, a movement in one may not really affect the other.

Without paying attention to the correlation between your trading instruments, it will be difficult to know how much unnecessary risk you are placing on your shoulders.

Be careful with position sizes

Position sizing is a very important decision when you’re trading. Many traders have the habit of just picking a random number, like 1 percent, 2 percent, or 3 percent. Then, they would apply it to all their trades and never think about position sizes again.

Remember that your trades roll on a game of chance.  Most of the time, your position size should be proportionate to the chance you have to gain something big. If you stand to lose, you wouldn’t bet as much as you would when you stand to win.

Bear in mind that different setups and strategies have different winrate. This is also true for the risk-reward ratio for each strategy.

What you should do is reduce your position size on setups with low winrate. When it’s higher, you can increase your position size.

Conclusion

Risk management is very important. The better you manage your risks, the more profitable your trades become. Pay much attention to it and use it in conjunction with technical analysis and fundamental analysis. Know every risk you stand to suffer and explore every possible way to manage it. After all, you can’t get rid of risks entirely. They’re inherent. The best thing you can do is to manage them.

 

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