Every investment involves risks and that certainly includes trading. Managing and minimizing your risks is one of the most important part of trading and in this article, we’ll show you how to do so.
The first crucial thing you can do to protect your capital and minimize your trading risks is to define a proper budget for it. By doing so and by calculating precisly how much funds you can dedicate to your trading activities, you make sure that you don’t go overboard and compromise your overall financial situation. The goal of any investment is to grow your financial ressources and manage the risks associated with it. As a general guideline, we do not advise to put more than 5 to 10% into trading but also to any investments. That way, even if things would get really ugly, your wealth is protected. The same thing applies for each trade. We recommend to not put more than 1 to 3% of your trading budget to each trade, again to secure your capital.
Having a strategy in place before each trading session will greatly help you to minimize your risks. You should know in advance which market you want to trade and why. The more knowledge you have about that particular market, the more you’ll be able to understand the price action. Don’t just trade because something is moving. If you don’t know key price levels and the fundamentals that influence it, you might get yourself into trouble. You should also know which indicators you will use to anticipate the next moves. Learn as much as possible about technical analysis as we believe that 80% of your trading decisions should be based on it. Check out our full lesson on this matter here.
Profit Targets/Stop Loss
Last but not least, make sure that you have established your profit targets and stop loss for each trade. This is crucial as it will prevent a bad trade for example to wipe you out of your budget. If you’re trading in the Forex on leverage for instance, things can move quite quickly so having a stop loss in place will prevent significant losses to occur and you to start becoming fearful. Fear pushes us to make really bad decisions and you do not want that to happen when it comes to finances. Put on a stop loss between 5 to 10% of your trade. That way, if you’ve invested 100$ in one trade and the market moves against you besides your due diligence, you will only lose 10$. Same thing goes for your profit targets. Define a conservative margin that will ensure that you make money but don’t become too greedy as, just like fear, this can push you to make the wrong call. Having a target around 1 to 2% profit per trade is enough to make significant gains, especially if you’re a day trader and trade multiple times a day. At the same time, it ensures that you take your profits while in the green and before the market goes the other way around.