WHAT IS RISK MANAGEMENT 📚👇
Trading risk management is simply about protecting your money while trading. The goal is to reduce the chances of big losses and make sure you stay in the game longer. Here are the basic steps:
1. Set a Stop-Loss: Decide the most you’re willing to lose on each trade, and set an automatic limit to sell if the price drops to that level. This prevents big losses.
Example: If you buy a stock for $100, set a stop-loss at $90. If the stock drops to $90, it will automatically sell, limiting your loss to $10 per share.
2. Position Sizing: Decide how much of your total money you want to risk on each trade. A common rule is to risk no more than 1-2% of your total capital on one trade.
Example: If you have $1,000 and decide to risk 2%, you can only lose $20 on a trade. If the stock price moves against you, the position size will be small enough to keep you safe.
3. Risk-to-Reward Ratio: Make sure the potential reward is worth the risk. Aim for a reward that's higher than your risk.
Example: If you risk $10 on a trade, aim to make at least $20 in return. A 1:2 risk-to-reward ratio means you can still be profitable in the long run, even with some losses.
4. Don’t Overleverage: Avoid using too much borrowed money (leverage). While it can increase profits, it also increases losses, so use it carefully or avoid it until you're more experienced.
5. Set Loss Limits: Decide how much you’re willing to lose in a day or week. If you hit that limit, stop trading to avoid emotional decisions and bigger losses.
By following these basic rules, you can manage risk, protect your capital, and increase your chances of success in trading.
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