What do you commonly hear as a response from anyone when they discover that you are in a stock market? Normally, they will say it’s very risky and that you should walk away from it. Some would doubt forex trading as gambling.
To tell you the truth, trading is risky. Whichever market you opt to be part of, trading is risky but it is not because of the market. It is risky because of the trader himself.
Knowing this fact, how can one be successful in this career? What is the part to be taken attention of? Let us know more in detail what a risk is.
Risk in The Trading Market:
The main risk in the forex trading market is the unpredictability. That is the main insight, at least.
Any event or news leads to a sudden rally or crash in the market. Mostly, the market’s movement is opposite of what is reported in the broadcast.
You face more problems if you’re a technical analyst. You will realize that the market seems not functioning as you learned from the trading techniques. How many instances that you experienced wherein you saw a set-up of a perfect trade and took that? For a time, the trade went your way, but suddenly, reversed the whole moves? Statistics even show how risky trading is. Only about 4-5% of traders gain in the market.
This was the reality when there were still no computers and reality today when you have algorithms and trading systems that are coded to help you.
This is the market’s risk. But you can do something about it. If you want to be a successful trader, you must learn that risk management is the most important skill for that.
Risk Management in Trading:
Trading is somehow like driving your car, especially one with unclear windshield and foggy outside.
In such scenarios, these are the things that you can improve:
1. Make the windshield clear which is the trading plan.
2. A car that is well- serviced which is a robust platform for trading.
3. Wearing a seatbelt and driving with alertness which stands for risk management.
In trading, the way to protect your capital is through risk management. It’s like wearing a seatbelt while you are driving, to protect yourself.
There are many risk factors that can go against you in the trading market:
1. Wrong moves.
2. Wrong trades.
3. Wrong information.
4. Your trading platform.
5. News and announcements.
Do these things make the market riskier? It doesn’t. It means there are procedures to take in trading in the market, just like in taking steps to cross a busy road. These steps are part of the risk management, and stop loss is not that.
Stop Loss is Not Risk Management:
Most trading newbies assume that stop loss is risk management, which is incorrect. Stop loss is just one of the many techniques in managing risks. Risk management in itself is a concept. Again, like driving a car, a seatbelt alone is not enough. You need a set of good tires, brakes and lights to maintain safety on the road.
In the same way, risk management includes:
1. Monitoring the trade.
2. Position sizing.
3. Booking regular profits.
4. Hedging carried positions.
5. Avoiding uncertain trade set-ups, and
6. Stop loss and sprawling stop losses.
If you don’t place an appropriate system of risk management, then you are gambling your trading capital. One of the reasons why most beginners fail is that they are too focused on looking for the trading method that’d work for them. Truth is, there are a lot of ways to earn in trading. But none of the methods will work on all conditions of the market since it is ever changing. To secure your trading capital, you should have a risk management system.