A successful trader does not mean that they are good traders, but rather that they are good managers. Good risk management is seen as the key to long-term success.
Existence comes first
The first and foremost goal in capital management is survival. You need to avoid the risks of getting out of trading. The second goal is to increase your income slowly, and the ultimate goal is to increase your profit margins.
The losers often put all their capital into one transaction. They continue to trade the same volume or above that level. Most losers try to escape the hole they dugout. Good financial management helps you get out of that hole in the first place.
The deeper you sink, the harder it will be to escape. If you lose 10%, you need 11% to get back to where you started, but if you lose 20% you need 25% to get back to the same level. And if you lose 40%, you need 67% back. And, with a 50% loss, you need 100% to get it back.
Get rich slowly
New people entering the trading field often try to get rich quickly. They may win in the short term, but in the long run, they will return all to the market because of the big risks.
Did you know, someone who makes 25% of annual profits can become the king of Wall Street? A trader who has the ability to double his capital in just one year is considered a star in this field. If you make 30% profit in a year, I guarantee people will bring money to your management (compare with savings at the bank for interest).
How much is the risk?
Most traders are destroyed by one of two bullets: carelessness and emotion. A trader overcomes carelessness and achieves a certain level of success, when his confidence increases, he will lift his head from the trench – and the second bullet appears. Confidence made him greedier, he began to increase the risk in a trade, and constant losses would put him out of the fight.
A professional trader does not allow a loss of a small percentage of their capital in a trade. The tests show that the maximum risk that a trader can accept a loss in a trade is about 2% capital. This limit includes both commission and slippage. If you have an account of $ 2000, you shouldn’t risk more than $ 40 in every trade.
Most amateur traders shake their heads in frustration when they hear this. Because many of them have small capital and the 2% rule has shattered the dream of getting rich quick. Most professional traders believe that 2% is too high, they do not allow themselves to risk more than 1% to 1.5% of capital per trade.
The 2% rule helps you avoid major losses the market can cause to your account. Even a series of 5 or 6 losses in a row won’t knock you out of the market.
Every time you review a trade signal, check your stop loss, if the stop is greater than 2% of your capital – ignore the trade signal, waiting for a less risky entry. Waiting can reduce your excitement, but the potential for profit will be greater.