Trading can be rewarding or risky based on how you do it. If you are careful, you increase your chances of massive gains. But careless behavior and impulsive decisions can land you in trouble soon. Sometimes you can even lose all that you earned if you don’t manage your risks well. Many active traders overlook this simple but essential part. They believe that such an approach can thwart their chances of winning. But you know markets are unpredictable. You cannot analyze your situation without being conscious of the price volatility and risks. So if you make sure to proceed with care, you can reap benefits.
The 1% Rule
It is the primary thing for every trader. As per this rule, you don’t invest more than one percent of your savings in trading. Or you don’t use more than 1% of your trading account in a single trade. To be precise, if you can afford $10,000, you will not put more than $100 in any instrument. Traders with less than $100,000 in their accounts usually follow this. However, if you can afford more, you can increase it to as much as 2%. Still, it can be better to keep your percentage lower because the size of the position tends to grow with your balance. So keeping it less than 2% or more can be helpful.
Practicing this is a part of risk management can be wise, says Peter DeCaprio. When you do it, you create a safety net for your investment by reducing losses while increasing the chances of profits.
Stop-Loss and Take-Profit
Stop-loss is the price point that you can determine to sell your stock on loss. You can use this technique to stop further erosion of your money. In trading, people often witness a day when not everything happens the way they desire. This strategy helps them control their losses, even on a hopeless day. Doing this also helps them come back to the market with a renewed spirit.
Similarly, a trader uses take-profit order to sell a stock at a specific profit point. It comes in handy when the upside is nearly predictable—for example, shares have a resistance level after rising continuously. As a trader, you may want to get rid of them before the consolidation happens. It can be a necessary step as many stocks go down after reaching the top mark. Hence, it can be another risk management technique for you.
It would help if you took calculated risks when you step into the world of trading. The rewards can make you greedy. But you have to stay clear of this and emotional attachment too. If you start making your decisions emotionally, you can lose everything. That’s why it is always better to enter this space with proper strategies. Risk management can be one of them. It can act as your safety net in this volatile market, where risks and rewards can be too overwhelming. However, if you plan it well, you can control any situation regardless of profit and loss. So, be patient and implement the proper techniques to maximize gains and minimize losses.