How Do Professional Traders Manage Their Risk While Trading?

Risk management not only helps minimize losses, but it can also help ensure that you won’t lose all investment capital available in your funded accounts. Risk generally comes about when you incur a loss during a trade. If you can manage this risk, it will become easier for you to open yourself to making good profits in the forex market.

Risk is an important but frequently overlooked requirement to becoming a successful trader. You have to remember that in the dynamic world of trading, a trader who has made a significant profit from an investment can lose it all in a single bad trade. This is a common occurrence among traders who don’t have any kind of trading strategy.

So, what can you do to help curb your exposure?

Learning To Plan Your Trades

If you’re to become an active trader, you must learn the importance of planning and strategy. The first step you’ll need to take is to confirm that your chosen broker is the best fit for frequent foreign currency trading. Not all brokers in this space are the same. Some only cater to the needs of traders who engage in infrequent trading. Such brokers will tend to charge a higher commission than their counterparts and may lack the tools you need to trade actively.

Secondly, take-profit (T/P) and stop-loss (S/L) points represent two methods that you can use to plan ahead when trading on mt5 prop firms. Active investors are aware of what price they’re comfortable paying and at what point they’ll be willing to sell. Using these two points, they can measure the expected results against the likelihood of the commodity hitting its targets. Such traders will only execute a trade once they’re sure that the adjusted return will be high enough.

On the other hand, you have traders who enter a position without a clue as to when they’ll sell the asset or even whether their exit position will return a profit. For such traders, emotions may soon take over, especially when they begin a bullish or bearish run. And whenever emotions come into play, the result is poor decision-making. For example, a loss could provoke an unlucky trader to limit their positions, while a win could entice them to hold on to an untenable position with the hope of gaining more.

Implementing The 1% Rule

Many day traders using a funded trader program observe what’s called the 1% rule. Generally, what this rule suggests is that you shouldn’t invest more than 1% of your total investment capital in a single trade. Therefore, if the remaining capital is $20,000, the position you take on any given asset shouldn’t exceed $200.

It’s a strategy commonly applied by active day traders whose accounts have a balance of less than $100,000. While the 1% rule is the most commonly applied, some traders choose to go as high as 2% if they believe that they can afford to take the risk. Traders with large balances may occasionally elect to trade with a much lower percentage. The school of thought here is that your position will increase as the balances increase. As such, to ensure you can keep your losses low, try to stick to the 1% or 2% rule and nothing higher than that.

How To Setup Your Take-profit And Stop-loss Points

A stop-loss point, as the name suggests, is a price where a trader is willing to sell a commodity and walk away with a loss on their position. It’s a situation that typically occurs when the trade fails to turn out as the trade may have wanted. The purpose of a stop-loss point is to prevent wishful thinking or what we call the “it will come back” mentality. With a stop-loss point in place, you get to limit your losses before they become too high.

Conversely, a take-profit point refers to a price where traders using funded accounts will be willing to sell an asset and accept the profit returned on their investment. It’s a situation where the additional upside has a limit, factoring in the risks. For example, if a given commodity is slowly approaching a crucial resistance level after a bullish run, you may want to sell it before the consolidation period can begin.

What’s The Most Efficient Way To Set Stop-loss Points?

Traders typically use technical analysis to help them set take-profit and stop-loss points. However, fundamental analysis may also come in handy in helping you determine the timing. For instance, if you have been holding on to a commodity awaiting an earnings statement, you may want to sell it before the statement hits the newsrooms, especially if the expectations in the markets are too high.

Moving averages are the best way to set these two points. This is because they’re simple to calculate and are extensively tracked by players using the funded trader programs. Some of the most common moving averages are the 5-, 9-, 20-, and 50-day averages. You can apply them to your trading chart at either a support or resistance level to help you establish whether a commodity’s price has reacted to them previously.

Another recommended way to place take-profit and stop-loss levels is on the support or resistance trend lines. You can draw these by linking previous lows or highs that may have occurred on significant, above-average trading volume. The trick lies in defining levels at which the price will react to the moving averages or trend lines and, of course, on increased volume.

When setting the take-profit and stop-loss points, you’ll need to make the following considerations:

Make use of known fundamental events, e.g., earnings statements, to know when to enter or exit a position.

Adjust your moving averages to match your target price levels. For instance, long-term targets should always use large moving averages.

Use the market conditions to adjust your stop-loss points. For example, if you notice that there’s little movement in the commodity prices, tighten these points.

If you have a volatile stock, try to use a longer-term moving average. This will help prevent a stop-loss from getting triggered by a meaningless price swing.

Diversify And Hedge

Making the most of your foreign currency trading means learning to diversify. Diversification calls for you not to put all your “eggs” in a single basket. Placing all your investment capital in a single trade means you’ll be setting yourself up for failure. When it comes to diversification, the best way to do it is across geographic location, market capitalization, and industry sector. Adopting such a trading strategy helps manage your investment risk while opening you up to emerging trade opportunities.

A time may come when you find yourself needing to hedge a position. For stocks, consider their positions when their results are imminent. Alternatively, consider taking a different position via options, as they can help safeguard your positions. You can then unwind the hedge once trading activity has subsided.

Conclusion

Active traders using the mt5 prop firms should always have an idea of when they’ll enter or leave a position way before they execute a trade. By learning how to use take-profit and stop-loss points efficiently, you’ll not only limit your losses but also the number of times you needlessly exit a trade. In conclusion, create your trading strategy in advance, and use a journal to track your wins and losses.

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