A lot of focus is always put on the actual trading – the placing of trading orders to the broker. With such an approach, most people forget that the second part is just as important, if not more, and that is risk management. After you have placed your order, how you manage it can be the difference between winning and losing.
Therefore, today we’re going to focus on this part, which is usually overlooked. We will even make it very simple, just these 3 tricks can change how profitable you will be.
Keep your lot sizes reasonable
This is the most important fact that we cannot stress enough. It can be tempting to think about making a huge profit from just a small movement in price, but you have to ask yourself if it matches your capital. Trading bigger lots on a small capital can wipe out your account very quickly. Inasmuch as bigger lots can bring greater profits, so can they do the opposite.
We understand why it can be frustrating to trade smaller lots, even with a huge price movement you may only end up with a few dollars in profit. The trick is to look at profits in terms of percentage rather than looking at the hard numbers. If you do this, a $20 profit on a $500 account capital should be just as attractive as a $1,000 profit on a $25,000 account – a 4% return. Do you need more motivation? Consider that a 10% return is impressive on Wall Street at an investment firm.
A usually quoted proportion is never to risk more than 2% of your account balance in a single trade. This is a very reasonable percentage, and you should try as much as possible to stick to it. If you think that’s too low, or you feel very confident about a trade, give yourself up to 5% but no more. Do not be greedy, success will come with patience.
Always use a stop loss, and stick to it
When I first started trading, I would use a stop loss, and would lose because all my trades would hit the stop loss and close the position. Then I rebelled and decided I would not use a stop loss anymore. What happened is that my losses became greater and soon I was out of business. If you feel the same way, take a hint and try to be a better trader with practice – do not blame the stop loss order.
However, if you are still getting frustrated, try and reconsider how and where you place your stop loss. Markets will never be completely regular, so you need to give your trades some room to ‘breathe’. By this I mean, don’t place the stop loss too close from the opening price, but you should also consider if you can actually take the loss without losing too much capital. Besides, ensure your take profit is at least double the loss, if you’re stopped out. Besides, what would be the point of risking what you can’t make or more?
Finally, stick to the stop loss after it’s placed. Do not expect that the trade will go in your favour and keep moving the stop loss farther away. If you do so, you might have to keep moving it until your account is completely wiped.
Keep your leverage reasonable
Leverage is a double-edged sword, and it can wreak havoc on your account if you are not careful. In fact, this is why many forex regulators are insisting on a cap on leverage at 1:50, because they have noticed how many people lose money as a result. There is no recommended leverage amount – that has to depend on your trading strategy, risk appetite and experience.
The trick here is to ensure your selected leverage does not risk your account capital. That is also why the same forex regulators I just mentioned are advising traders be limited to 1:50 until they prove they can handle more. However, I will say this, do not use 1:1000 leverage because that is just ridiculous.