Like it or not, trading is risky. However, depending on the trading strategies, knowledge and experience, one can manage losses. Let’s look at the steps one may take to come up with an effective risk management approach.
Study the market
An important factor that leads to losses is lack of knowledge. Professional and experienced traders do not usually rush into trading before thinking their strategy through and they do not rely on luck. It is very important to study the market and understand the trend. Simple guessing is not a valid strategy and it may do you more harm in the end.
Fundamental analysis can be a powerful tool and a key to get a better understanding of the market conditions. Though it may sound complicated, in reality it does not have to be so. For example, many traders might start small and concentrate on a certain market in which they are most interested in (e.g. if someone is into technology and gadgets in daily life, they might enjoy trading stocks of IT companies).
Technical analysis is just as important and beneficial. You may use indicators that our platform offers in order to evaluate the assets. There is plenty of information about indicators that you can check out in the Trading tips section of our blog.
Develop a trading plan
A hectic approach to trading is another major reason for losses. Selling with a small profit only to see the asset rise even higher? Hoping that the price will reverse and keeping a deal in loss, only to see it loose even more? These are the things that a trading plan helps to control and prevent. If mapped out properly, it may partially take away the pressure of uncertainty and stop you from panicking.
Plan out the investments you are going to make, set your limits and think your budget through. How much can you afford to lose if things go wrong? What are your expected returns? Think about the instruments you will be trading and the exit points for your deals. Manage your risks by scheming every step of your trading activity. Being organized pays off in any endeavor, trading is not an exception.
Control your emotions
Do not underestimate the power of your emotions: they can interfere and seriously affect your trading strategy and, consequently, the results of the deals. Anger can make you start acting irrationally.
It may be hard to accept that losses are a part of the trading journey, but it is necessary in order to move forward. Traders go through five stages when it comes to this simple fact: denial, anger, bargaining, depression and, finally, acceptance. Quite often, it means losing money on the way to this realization. Knowing how to avoid this spectrum of emotions and retain composure may help you concentrate on your plan and follow it closely.
It is worth mentioning that owning your emotions is just as important after successful deals as much as after losing deals. It is very important to focus on the trading plan and not get carried away.
Conclusion
Taking your time to map out a risk management strategy is beneficial to traders of any level of experience. A written down plan might help you get in the right mindset, strategize and prioritize your actions as well as manage your losses.
