We all are aware about how riskier trading can be if we are careless. So here are some tips to manage risk.
Setting orders and the reward:risk ratio
When you spot an entry signal, think where you’d place your stop loss and take profit order FIRST. Once you’ve identified reasonable price levels for your orders, measure the risk:reward ratio. If it doesn’t match your requirements, skip the trade. Don’t try to widen your take profit order or tighten your stop loss to achieve a higher reward:risk ratio.
Never even use fixed stop distances
Many trading strategies tell you to use a fixed amount of points/pips on your stop loss and take profit orders across different instruments and even markets. Those “shortcuts” and generalizations completely neglect how price moves naturally and how financial markets work.
Always compare winrate and reward:risk together
Many traders claim that the figure winrate is useless. But those traders miss a very important point. While observing the winrate alone will provide you with no valuable insights, combining winrate and risk:reward ratio can be seen as the holy grail in trading.
It’s so important to understand that you neither need an insanely high winrate, or have to ride your trades for a very long time. For example, a system with a winrate of 40% (which is what many professional traders average) only requires a reward:risk ratio of greater than 1.6 to trade profitably.
Take spread seriously
For the most liquid instruments, spreads are usually just a few pips and, therefore, traders view them as they weren’t even existent.
Research shows that only about 1% of all day traders are able to profit net of fees.
Don’t use daily performance targets
Many traders will randomly set daily or weekly performance targets. Such an approach is very dangerous and you have to stop thinking in terms of daily or weekly returns. Setting yourself daily goals creates a lot of pressure and it usually also creates a “need to trade”.
Try to follow it and you will be successful.