Risk management
Risk management is without a doubt the most important part of trading. Here too, many novice traders go wrong. Even if you have the best trading strategy in the world, without risk management there is a good chance that you will lose a lot of money when trading with such a strategy. Finding entry moments is much easier than managing your trade and getting the most out of it. This is why it is one of the three main trading skills.
In the book we will explain what risk management entails and how you apply it.
Below is an excerpt from the Risk Management section. We will, of course, also discuss this further in the book.
Risk management
Risk management is a very extensive topic and can take quite a long time to master. If we went into full risk management, we could fill the book with an additional 100 pages. In this trading plan, we will establish a good basis for risk management, which you can build on yourself.
Now let's set up the third and final part of your trading plan.
What is the type of account you have, and how large is it?
"I have a 500 Dollar mini account."
What is your risk profile?
"I don't like to take risks"
This is an important question that only you can answer. Some people are naturally reserved, and others like to take a lot of risks. The way you naturally deal with risk can hardly be changed, which is why it is easier to see how you deal with risk and work around it.
For example, it can be good and bad to be reserved. It is good because you only take good trades in your eyes. The disadvantage is that you ignore many trades because YOU find them too risky. There is a good chance that the entry moments that you found too risky will turn out well. In principle, this can save you a lot of profit. Traders who, therefore, dare to take more risk had taken these trades and made more profit.
The disadvantage for them is that if you dare to take more risks, you will also lose more. It is, therefore, possible that the risky people will have more profit at the end of the ride. There is no right or wrong to be risky or reluctant. As long as you are honest with yourself and know what your risk profile is and work around it. For example, if you know that you are a risky trader, you can adjust your rules to limit your losses when you know that you are taking a risky trade for you. For example, risk less per trade, or even better, vary/spread your risk. This will be discussed in the following question.
What is your maximum bet per trade as a percentage of your entire investment?
"I risk a maximum of 2% per trade."
When you enter a trade, you risk a certain percentage of your total investment.
Having a maximum percentage of risk per trade that you take allows you to manage your risk in the long term. Most starting traders do not think about risk, they risk 5 or 10 percent, or sometimes more percent per trade. Suddenly they lose a few trades in a row, and in no time, they lose 20 or 30 or 40 percent of their investment in a few days. Trading is about minimizing your risk so that your account grows, and you make a profit in the long term. Risking large quantities per trade is no longer trading, but gambling. As soon as you get a series of losses in a row, which is normal, you lose a large part of your investment, so it's not smart to do.
That is why it is important that you have a maximum percentage of risk that you take per trade and that you stick to it.
