Trading knowledge including technical analysis, good strategies and chart reading are all necessary but alone are not enough to make you a successful trader
Today’s post is going to be one of the most important you’ll ever read. Here I will discuss risk management. Because if you apply the risk management strategies, I can guarantee you’ll never blow up another trading account and you might even become a profitable trader
Risk management is the foundation of a successful trading system. We can basically break risk management into 3 categories:
Active Trade management
Let’s discuss all these in details
In order to protect against something it is necessary to begin with an understanding of what it is that you are protecting against.
It is fine to say that protection is being taken against potential loss. Losses are inevitable part of the trading game. We need to accept losses as cost of doing this business. World’s best traders too lose a lot.
The underlying root cause of a loss in any particular trading situation is the trader’s own fear and greed.
Let’s start with fear
Fear warns you that something doesn’t feel right about a trade that you took; you have to try to figure out what exactly is going wrong
Any fear that does exist works in two ways.
There is the fear of missing an opportunity (FOMO)
There is also the fear of incurring a major loss
The protection against each is somewhat different.
Let’s discuss each in depth
Protection against Fear of missing an opportunity (FOMO)
How it affect our trading
The fear of a missed opportunity may result in a premature trade. What most of us do We’re so afraid of missing a profit that we tend to constantly trade too early.
The common mistake made here is to conclude that a little bit of a wait is no problem because the eventual result will justify it. How do you know it’s going to be just a short wait? That’s an assumption.
A much bigger problem, however, is that the judgment (upon) which the trade is based may be invalid. Because that opportunity has not had a chance to fully develop.
That means something could go wrong. If it does, the position will probably be stopped out.
HOW TO PREVENT Fear of missing an opportunity (FOMO)
Unfortunately there is no mechanical tool that will invariably keep you from trading too early.
Protection against the fear of missing an opportunity is discipline and confidence on your method
I will give 4 steps for Discipline Trading
Take direction from the market, not from your hopes, greed or fear. Most traders do not see the market clearly. Control your beliefs about the market
Predefine your risk before taking a trade
Cut your losses without hesitation
Use a systematic money management plan
Confidence in your method makes all the difference in trading.
You will not be able to make money unless you have total confidence in your methods.
But the problem is that you will not have confidence in your methods if you are not making money with it.
To become a consistently profitable trader, you need to develop a method that suits your personality.
When developing a trading plan, you should know and understand the logic behind each step. This will boost your confidence and will give you the discipline to follow the plan. Confidence believes in your ability to do something.
To be successful in trading, we must have a method with an edge. We need to trade the method long enough
Ignoring the results of individual trades to win. This is not possible without total trust in your methods. If you have Confidence in your trading method, losses shouldn’t worry you at all. Just take it and move on. Successful trading is not totally avoiding losses but winning more than what you lose.
For every trade we enter, there could be four outcomes. a) Big Loss, b) Small Loss, c) Small Win and d) Big Win.
Let us remove the Big Loss from this. Small Wins will take care of Small losses and Big wins will remain with us. Ensure that your trading plan eliminates the possibility of losing big.
“You can’t make money if you are not willing to lose. It’s like breathing in, but not willing to breathe out”
That will be all for today, I will continue tomorrow from where I stopped. I hope you are blessed☺