I might not be a prophet, but one thing I know for sure is that as long as you see this post, you are a trader that has been asking the question, "What is risk management in trading?"
Risk management permits traders to minimise their losses when trading, and it is one of the most significant concepts to a lasting success while trading the financial markets.
Since we are making money trading online, this is one of the most vital topics every trader will want to read about, as we seriously need to avoid potential losses.
Most traders fail because they fail to recognise risk management as a crucial part of their trading strategy, and this is simply because they never bothered searching the term "what is risk management in trading?"
Risk management aids in the reduction of losses. It can also help to keep trader's accounts from squandering all of their funds. When traders lose money, they are exposed to risk. If the risk can be controlled, traders can increase their chances of making money in the market.
Risk Management Techniques
Many newbie traders think that making money trading online, is an accessible and get-rich-quick business. However, what they don't know is, that it requires a lot of time, patience, and dedication to make it worth while trading.
There is a famous saying, "Don't focus on making money, focus on protecting what you have." But, when you focus more on making money while trading online, without protecting your investments, you are gambling. So, you need to apply some risk management techniques if you want to be a successful trader.
Let's go through some risk management techniques that will help us protect our trading portfolios.
Only Trade what you can afford to lose
To risk what you can afford to lose is the first risk management tip. Every professional trader knows this tip, and many must have heard of this, but they don't take it seriously.
It is 100% conceivable to lose all your capital on a single trade, so I wonder why anyone would want to risk that. However, on the other hand, much pressure comes while trading with vast amounts of money. These pressures affect our decision-making, so instead of making wrong decisions based on our emotions and assumptions, let us deal with what we can afford to lose.
Appropriate Position Size
The Second risk management tip is to select the appropriate position size while trading. This is popular in forex trading, and this technique helps to protect your account from losing all your funds within a short time. In other to select the appropriate position size, you need to determine your stop placement, risk percentage and evaluate the pip cost and lot size.
Implementing the 1% Rule
We would be talking about the following risk management tip, which is popularly known as the 1% rule. This is to control our risk per trade, and this technique is fundamental, especially to those new to trading and who don't have a significant trading capital. You should only trade 1% of your worth, and this is a sound money management system.
Making use of stop-losses
To manage risk, we should not forget to set up a stop-loss. When we set up our stop-loss point, we protect our account in a situation where the trade does not turn out the way we expected. So always add your stop-loss point when trading. It is essential.
I guess I have answered your question, "what is risk management in trading"? So now that you fully understand risk management in trading and understand some of the techniques let's go and implement them and save ourselves from losing money.