If you want to be successful at trading then you need to know how to control risk. Risk management is one of the most important aspects of trading if not the most important. Not using proper risk management will result in significant losses. It doesn’t matter what you are trading stocks, crypto, or forex it’s all the same, you need to minimize your losses to be successful. I am going to give you a brief overview of how to do this.
The first thing you should understand is there are multiple ways to go about this but here is one way. You want to make sure your losing trades are smaller than your winning trades. So for example a 1:2 Ratio means for every winning trade it requires two losing trades to lose your money. This means if you placed 20 trades you could lose 13 times and only win 7 times and still come out profitable. You can use whatever risk reward ratio you are comfortable with can be 1:3 or 1:1.5 as long as you have a plan to follow on when to cut your losses.
Here is a trade below of a Double Top short trade on Spy with a 1:2 ratio.
Account Size To Trade Percentage
Another thing is don’t risk more than 1-2% of your capital. So if you are trading with a $25,000 account and you are risking 2% your stop loss should not be more than $500. I would recommend sticking to .5% – 1% until you are confident with your strategy. This will keep you from losing half of your account because of a series of bad trades. Trading is about surviving and if your account gets wiped out just because you had 3 bad trades in a row then you will never get the chance to be successful. Trading takes time to learn and you won’t get a chance to learn if you lost all your money before you have the chance to develop your strategy. You learn from your losses and that is why you shouldn’t be placing risky trades that could destroy your account.
I recommend not just placing your stop losses at exact numbers either. Don’t put your stop at a random price just because it matches your 1:2 risk ratio. Your stops should be at pivotal points on the stock you are trading at around support and resistance levels. So you need to look for setups that place trades near key levels this will give a much higher advantage.
If you simply want to gamble because you can’t resist it then I recommend setting aside a small portion of your account each month for that purpose. This can be whatever amount you are comfortable losing. This will allow you to place the trades that have a lot of risk but without gambling your whole account.
Using proper risk management will make trading much less stressful and you won’t be stressing out over a few bad trades. It will help you keep your emotions in check which is very important to be successful. Risk management alone will not make you successful it is something you need to combine with your strategy because even the best strategy will fail if you don’t manage risk.