TRADING RISK MANAGEMENT STRATEGIES
Explained
The Common risk management strategies:
There is no single way to approach risk management.
Meanwhile , Investors and traders often use a combination of risk management tools and strategies to increase their chances of growing their portfolios. Below are a few examples of strategies that traders use to mitigate risks.
1% TRADING RULE:
The 1% trading rule (or 1% risk rule) is a method traders use to limit their losses to a maximum of 1% of their trading capital per trade.
This means they can either trade with 1% of their portfolio per trade or with a bigger order with a stop-loss equal to 1% of their portfolio value. The 1% trading rule is commonly used by day traders but can also be adopted by swing traders.
While 1% is a general rule of thumb, some traders adjust this value according to other factors, such as account size and individual risk appetite. For instance, someone with a larger account and conservative risk appetite may choose to restrict their risk per trade to an even smaller percentage.
SL/TP order(Stop-loss and take-profit orders):
Stop-loss orders allow traders to limit losses when a trade goes wrong.
Take-profit orders ensure that they lock in profits when a trade goes well. Ideally, stop-loss and take-profit prices should be defined before entering a position, and the orders should be set as soon as the trade is open.
Knowing when to cut losses is essential, especially in a volatile market where prices can tumble rapidly. Planning your exit strategy also prevents poor decision-making from emotional trading.
The stop-loss and take-profit levels are also essential for calculating the risk-reward ratio of each trade.
TO BE CONTINUED...