Risk Management

Importance of Risk Management

Risk management protects your capital and ensures long-term trading sustainability. It involves identifying, assessing, and prioritizing risks followed by application of resources to minimize and control the probability of unfortunate events.

Position Sizing

• Risk Per Trade: Decide the percentage of your capital you're willing to risk on a single trade (commonly 1-2%).

• Calculating Position Size: Use your risk per trade and the distance to your stop-loss to determine the number of units to trade.

Stop-Loss and Take-Profit Orders

• Stop-Loss Orders: Automatically close a position at a predetermined price to limit losses.

• Take-Profit Orders: Automatically close a position when it reaches a certain profit level.

• Setting Levels: Base your stop-loss and take-profit levels on technical analysis, such as support and resistance levels.

Risk-Reward Ratio

• Definition: The ratio of potential profit to potential loss.

• Optimal Ratios: Many traders aim for a minimum risk-reward ratio of 1:2, meaning they risk $1 to potentially gain $2.

• Balancing Ratios: Adjust your ratio based on the probability of trade success and market conditions.