Saturday, 3 November 2018

Manage Your Risk

To learn how to manage your risk is the first one, maybe only one most important aspect of trading.  This way you will stay in business.


The first thing one should do when making money management
parameters is determine how much one should risk.
The following three steps might seems simple, but effective:
  1. Let's start with the  total  available  capital,  that  should  not  be  how much you trade with. Instead, you should take your available trading capital and divide it in half or whatever percent you feel comfortable with. If it’s one-half, this is what you will use to trade with; let’s call it the at-risk capital.
  2. Next take a fixed percentage of one’s capital on each trade. This is known as fixed-fraction money. The typically accepted amount one should risk per trade is 5 percent or less of one’s total at-risk capital. This will give you 20 losses in a row before the at-risk capital is wiped.  Then you still have the other half of capital left for a second change.
  3. Position  size  is  a  very  important  part  of  trading  and  can  hurt
    traders.  Not  knowing  how  much  to  trade  is  something  that  can

    really end up hurting you. Markets should be judged by risk or average true range (ATR). Using this number or a multiple of the ATR, or look at the ATR of a weekly chart to determine how much is at risk.  Divides the fixed-fraction money from step two by the ATR. This will give you the maximum number of share to buy. Keeping a simple table can be very helpful.


A Few Things One Can Look at When Deciding How Much to Risk:
  • Are you trading with trend?
  • How close is the market to its trendline or moving average?
  • Has the market moved too much already?
  • How far away is the stop?
  • How much can you lose?
  • How much can you make?
  • How do you usually do with this type of trade?
  • How confident do you feel?

Useful links to older posts and to read more about Risk Management:


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