Managing risk is a key skill for financial traders, and developing a risk management plan for your trades can be the difference between success and failure. Here are five tips to help you trade with confidence.
1. Know your risks
Politics, interest rates, liquidity, and even the prices of other assets are just some of the factors that might present a risk to your trading. Learn all the potential risks associated with the asset you are about to trade, and you can start to go about mitigating them early.
2. Set risk limits
Before you outline the profit you are aiming for, decide how much you can afford to lose. Your trading plan should include how much loss you can take overall, and on each individual trade.
3. Learn to take losses
If you know your risk limits for each trade, you can set stop losses accordingly. Moving a stop loss on a losing trade because you believe that it might swing back into profit is rarely a good idea. Letting losses run on bad trades will make them worse, not better.
4. Avoid emotional trading
A Barclays Wealth study in 2011 estimated that the negative effects of emotional trading can end up costing you 20% in returns over ten years. And it isn’t just reacting badly to losses, as the euphoria that comes with a successful trade can be just as dangerous as the disappointment with a failed one.
5. Don’t follow the herd
Every trader has their own tolerance for risk, and just because other traders are recommending a trade doesn’t mean that it is a good fit for you. This is true for stop losses and strategies as well: know your own risk, and plan accordingly.