Risk control and management in Trading


Controlling and managing risk in your trading operations is mandatory.

Mandatory if you want your account to last, of course.

As you have seen (and if not, you will see), the financial markets are full of sharks that you have to defend yourself against.

I am going to summarize the most important aspects to take into account to reduce the damage from the bites of these sharks as much as possible.

RISK MANAGEMENT: 6 fundamental steps

1. Put a stop loss on your life


If you are not clear on this, you have nothing to do.

The stop loss is your lifeline.

Along with your entry order, you always have to send the broker your stop loss order. Doing this before entering the operation will save you a lot of unnecessary trouble.

It’s the golden rule that you should never skip.

If you still have doubts about this important part of trading, here is a complete guide to turn to at any time.

2. Try to be in tune with the market

Take action by limiting your risk based on your results.

If you find that you chain too many failed operations, reduce the size of these. Or stop operating. There is nothing wrong with resting for a while when you see that your trading is getting out of hand.

It will be good for your pocket and, above all, for your head.

If, on the contrary, you have a good streak, you can increase the size of the positions and, little by little, increase the risk to take. Of course, always within limits.

3. Limit the size of your position

My recommendation is that you use the fixed risk method of 2%.

Never risk, between all your operations, more than 2% of your total account.

For putting numbers, if your account is € 20,000, do not risk more than € 400 in total between all the operations that you are going to carry out. If, for example, you plan to do 4 simultaneous operations, your risk limit will be € 100 in each one.

Optimal fraction

This method is more advanced and more complicated, but it reports the best possible results statistically.

Make the most of your streaks, increasing the risk when you win and decreasing it when you lose.

You can’t apply it from the beginning because a few sample operations are necessary to determine the risk.

Nor does anything happen if you always use the 2% rule, but know that, when you have 40 or 50 operations in your history, you can consider using this technique, as it will significantly optimize your trading.

In this article you can see how it works in more detail and download the “Exact Risk” tool to automatically calculate how much you have to risk.

4. Do not contradict the market

If you align with the global market trend, you have a better chance of getting out alive.

Imagine that you are tracking the American market in search of a good value and you notice that the trend is bearish and that the strength indicators indicate weakness. To reduce risk, you will avoid looking for medium-term bullish operations and will focus on looking for a security that offers the possibility of shorts.

This is not foolproof, of course, but it is about taking as few risks as possible.

Also lean (of course) on supports and resistances. Take into account the maximum drawdown.

For example, if the IBEX35 chart is just above support, you will have a better chance of winning if you are looking to trade long that are on relevant support.

5. Do not trade if you are not in conditions

If you have had a bad day at work, if you have argued with someone, if you feel enormous anger because you have been losing several operations in a row, if, for whatever reason, you cannot think clearly, do not operate.

That simple

Basically, if you are not feeling well physically and mentally, do not face the market.

Most likely, you miss some detail and by the time you realize it, it will be too late.

6. Take full control over your operations

Last but not least, it is imperative that you document all your operations systematically.

Documenting the operations performed with precision, order and detail is the key to forming a solid base and thus being able to learn from mistakes.

Without any doubt, gaining experience through practice is one of the best ways you have to reduce the risk of your operations. If you record all the mistakes and successes that you have, you can review them later to reflect and realize what you have to improve.

To keep this record up to date, I recommend that you create your own trading journal. If you don’t know how, here are a few ideas.

You know, any ideas that help improve risk management are welcome. Add it to the comments and share your experience 😉

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