People have made fortunes trading in financial markets, with the biggest and most inspiring example being Warren Buffet. On the other hand, people have also lost fortunes within the same field. If you know what you’re doing, however, trading has huge profitability potential.
It’s an exhilarating activity that rewards you for your knowledge, judgment, and courage. With that said, it’s easy to get carried away after a few wins, whereby people let emotions take over. As humans, all traders are somewhat prone to that, and that’s why proper risk management strategies are essential to one’s long-term trading success.
In addition, navigating the emerging popularity of crypto trading requires not only knowledge and courage but also proper cryptocurrency risk management strategies. Choosing a reputable crypto exchange further contributes to success, providing a secure and user-friendly platform for buying and selling various digital assets.
This article looks at a few tried and true techniques that you can employ to boost your profitability ratio. They’ll also help you protect your capital amidst the craziness of today’s financial markets. Let’s get into it!
1. What’s Your Risk Tolerance?
The first step in any financial trading activity should be a clear and unbiased assessment of your risk tolerance. Simply put, your risk tolerance is the range within which you can comfortably deal with trading account fluctuations. Aspects like your investment goals, financial situation, emotional disposition, and even self-control determine it.
If you precisely understand how much risk you can tolerate, you’re more likely to make smarter decisions (for example, regarding position sizes) and not get carried away with emotions.
2. Always Have a Stop-Loss:
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No risk management tool is quite as effective as the stop-loss order. It simply means that a security or position will automatically be sold or closed when the price falls below a certain threshold. Using this, traders can automatically exit a poor position at their perceived point of no return without bearing any further losses.
3. Appropriately Sized Positions:
No matter how great you may think a position is, it’s always essential to size it smartly. New traders often let their emotions get the best of them when it comes to this — often entering into huge positions if they’re too excited about an “educated guess.”
Within the bounds of proper risk management, your position sizing should be controlled as per the risk you’re looking to take and the scale of your trading account. As a rule of thumb, no single trade should be larger than 1 to 2 per cent of your overall trading capital. This way, the financial effect of losing trades on your portfolio is minimal — no matter how unprofitable they may have been.
4. Diversification:
We’ve all heard the old saying, “Don’t put all your eggs in one basket,” and while this advice holds true in many walks of life, it’s especially golden within the context of financial trading.
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Having a diverse portfolio is an age-old way to spread risk across several asset classes and assets. By not having all of your trading capital invested in any single asset or position, you protect yourself from sustaining any serious losses if a trade goes south.
5. Risk Management Strategy Re-evaluation
The market changes every day, and only those survive, who adapt in real time. Just like your trading account fluctuates, so should your risk management techniques. Factors like your risk tolerance and financial situation aren’t constant. They can go up and down with every passing day, so remember to continually evaluate your risk tolerance and evolve your strategies accordingly.
Conclusion
The desire to make huge gains in financial markets shines bright, and it’s often blinding. Whether you’re a beginner or a seasoned trader, there’s always a chance of getting carried away with fear or greed. That’s why, in the realm of trading, a solid risk management strategy will always be more reliable than your emotions.
In this article, we’ve shared five golden risk management tactics to help you secure your hard-earned trading capital and grow it in a safe and sustainable way. After all, trading isn’t all about scoring gains. You’ve also got to look after what you’ve gathered.
