Let's jump right into this one. No need for an introduction with this topic.
You’re here today on this page because you have some sort of fear of losing your hard earned money. We all know the feeling. We all never want that to never happen. I think we can all agree on that. Today we will go over some essential things you must do to minimize the risk of losing your money.
We need to get one thing straight. Trading is about profits and losses. There is no trader in the world that will profit on every trade. This is something you will need to get used to. It is something you will learn with time. And it is something that you will be able to manage. Losing a trade every here and there is not a bad thing as long as you learn from your mistakes.
Risk and Reward
Losing trades and risk management go hand in hand. And as everyone says, with risk comes reward. The main focus around the global markets is to take on risk, be able to manage it, and when possible eliminate as much as possible. As many people know, the higher the risk, the higher the reward. This is only true if the risk you are exposed to has been sufficiently studied and understood. Before you can separate types of risk it is important to understand more about risk itself.
There are certain risks that everyone knows about, however, that doesn’t mean that these risks are applied to everyone. Different people have different mindsets. Different people are looking for different things. Depending on the mindset or circumstances of a certain person, they will know how much risk is enough risk for them. This is where the idea of risk aversion comes from. Some people are risk averse, some people are risk seeking.
At any given time you need to know why you want to take a certain risk. More importantly, what you want to get out of taking this risk. If we are talking about financial markets, then you are most likely wanting to profit some money. To do this, you must be willing to risk some of your money. Now, the first rule is to never risk more money than what you have. This is a rule of thumb. Please do not forget this rule. You will regret it if you do.
Adopt a mindset where the money being risked is money you can afford to lose. Understanding that speculation is not the same as investing is also very important. Especially when speculating on a product through the use of leverage, a topic we covered in a previous article.
Know the Product Your Trading
Another important rule is understanding the product you are trading and how it works. Not knowing this will mean you are unable to assess the risk associated with trading this specific product. This will effectively lead to losing your hard earned money while trading.
OK, are you still here? Have I bored you yet? If you’ve made it this far you know whats good for you. Here is the secret money managing rule you should follow!
Respect Stop Losses
New traders are always ignoring their own money. This is not a good thing. If you ignore your own money it will eventually go away. Stop losses are made to protect you from this. They must be used. Again, all traders make losses. The traders who know when to take a loss, are the most successful.
There is a bias known as loss aversion, where traders do not acknowledge a trade is wrong. In turn they keep the position open in hope the trade will go in their favor. This is a very dangerous way of trading. Especially for new traders.
Our final rule is to always use and respect stop losses. More importantly, to know where to place your stop loss. We dig deeper into this concept in another article here. You must know that placing stop losses around round numbers or key support or resistance levels can leave you vulnerable. Bigger more professional traders use these price levels to intentionally flush out and trigger the stops. If you can, avoid placing your stops at these levels.
Understanding and learning about managing and limiting risk is a key part of moving up in the trading world. It is an essential part to keeping you in the market for a prolonged period of time. The longer you are in the market, the more you will learn. The more you learn, the more you are able to place yourself in a position to make money. These simple rules we have covered today are a very good starting point to stop the fear and risk of loss from entering your head.
Download a Baxia demo account today and start placing those trades with your stop losses. The earlier you start trading the faster you will learn.
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