Managing your risk is a good portion of your success as a trader. You have risk everywhere, in every aspect of your life. When you drive a car, you wear a seatbelt. When you cross the road, you look both ways. You don’t go near fallen powerlines. These are all common sense things because they involve your personal safety. One of the big things that will influence your career as a trader is how you are able to protect your financial safety as you go. There are a lot of little things that you will need to know, but unlike these above scenarios, you might not think of them as common sense at first. This needs to change if you’re going to be in this for a while and still make money. Let’s look at what some of these are.
First, don’t ever risk too much at once. This goes for the stock market on a sure thing, or in the Forex market, when our risk is magnified because of leverage, or for the binary options market where you stand to lose everything on a single trade. Keep your trades proportionate to where they should be. If you have a $2,000 trading account, you should never risk more than 2 or 3 percent on a trade–that’s $20 or $30–even if you are confident that the trade is going to be a winner. Certain types of trading allow for wiggle room, but this is a good safety feature to keep in mind.
When in doubt, cut the trade in half. There is a popular method of mathematically deciding what the best trade size is in proportion to your bankroll and the certainty of success. It’s called the Kelly Criterion. If you have a large bankroll, and follow this rule, you will theoretically never go broke. But this is for large bankrolls of $10,000 or more. Most people don’t have this much to start out with, and most people certainly don’t need to front this much cash, either. Instead, some of the best traders out there will use the Kelly Criterion number that they get, and then cut it in half. This keeps them twice as safe, but also ensures that they know they are only trading in the most profitable situations by assigning a number to their chances of success.
Know the Basics
This is an easy one, but it’s often forgotten. Your broker has tools that can help you become better at what you are doing, so use them. This will help you to avoid human error right off the bat. Be familiar with the software platform you’ll be using, and make sure that you know how the specific types of trades that you are making work. Many Forex and binary options brokers have demo software that you can test out before you actually begin trading with real money. Use it, and things will go smoother when you’re trading your own money. Some stockbrokers have this feature, too.
Trading is a lot harder than you might think at first. Even if you have a solid understanding of the markets, you can still lose money if you aren’t prepared for the fast pace of change that is ongoing. The best traders make sure that they are as informed as possible before they enter a position so that they can handle the risk on an intellectual level by being prepared. When you’re first starting out, you won’t have this same level of knowledge, so start slowly and with smaller amounts of cash. You can work your way up when you’re better able to realize the inherent risks of trading, and turn them into huge profits.
That’s the key to take away. Trading can be dangerous, but it doesn’t have to be. The better you get as you go along, the more you can turn the risk into extra money.