A practical guide to Risk management

3 Mar 2023

Hey everyone! 👋

While trading and investing offer the opportunity for profit, there is always the potential for loss. The most experienced traders know this best and in today’s post, we’re going to share several time-tested tips to help new traders and investors better understand financial risk and intelligent planning.

📝 Develop a Trading Plan

• Many traders jump into the market without a thorough understanding of how it works and what it takes to be successful.
• You should have a detailed trading plan in place prior to engaging in any trades.
• Having a plan can help you stay calm under stress and ensure that you are trading within your risk tolerance.


🧘‍♂️ Understand your risk tolerance

• Risk is subjective. Different traders have different personalities and systems, hence a different risk tolerance.
• There is no “One-size-fits-all” approach.
• Find out what suits your needs based on your account size, age, long-term plan, and other key variables that are specifically unique to your circumstances. Then, implement it accordingly.


📚 Follow your trading system

• A trading system lays down a set of rules that can help a trader avoid impulsive decisions.
• A trading system is essential because it requires you to think deeply about your approach to markets before you begin risking real money.

• Traders should backtest and research their system under different market conditions. Ask yourself how you would perform in a bear market? Have you tried paper trading your system to see if it works? Have you discussed your system with others or asked for feedback?

• Some traders hop strategies after a series of losses. This usually leads to more losses and is unproductive in the long term.
• If your system has a verifiable edge, then sticking to it will help you in generating consistent returns over time. It will also help you stick to your original long-term plan as mentioned above.


🚨 Use a Stop-Loss

• A stop-loss order is an order that is placed at a predetermined price level and can help in limiting your losses if the trade goes against you. It’s also used to ensure you’re sticking to your original trading plan or trading system.
• In general, this predetermined price level is the level at which your trade idea gets invalidated.


✂️ Manage your position size

• It's important to take an optimal position size so that there isn’t too much risk exposure in any given trade.
• Trading is a game of probabilities. Hence, a trader should never put all his eggs in one basket and if he does, then he should be well aware of it.


❌ Don't overtrade or revenge trade

• Although it can be tempting, it's never a good idea to try to recoup the losses by taking higher risks.
• It's easy to feel strong emotions while trading. However, making decisions based on emotions rather than rational analysis can be a recipe for disaster. If you fear that this is happening, walk away from your computer.


📔 Maintain a trading journal

•A trading journal can help you in identifying the shortcomings in your trading.
• Evaluation of this journal at regular intervals will help you in understanding and in improving yourself. The trading journal is a tool to self-reflect on your journey.


Thanks for reading! We hope you enjoyed this post. Please feel free to write any additional tips or pieces of advice in the comments section below!

Please remember this is an educational post to help all of our members better understand concepts used in trading or investing. This in no way promotes a particular style of trading!

See you all next week. 🙂

– Team TradingView

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