Risk control should be the portion of ones trading system. It tells you how much you can risk on one trade. It also guides you about the amount of risk you should be willing to take. This will assure your longetivity in trading. You can protect your trading capital, if you control your risk properly. Here are some ways to protect your trading capital.
1) Don’t risk more than 2 % of your trading capital on a single trade.
Its not advisable to risk more than 2% of your trading capital on a single trade. Whereas, if you have smaller amounts between 15,000-20,000, you may have to go slightly higher.
2) Don’t forget to use stop loss orders.
Stop loss orders will help you to protect the capital. Therefore, whenever you make a trade, use stop loss orders. Stops should be used in order to not let a winning position get away from you. In a trending market, stops should be moved along with the trend. Most of the traders don’t use the stops properly. They place the stops, but then they don’t want to take a loss, so they keep moving their stops as the market gets closer. This should be avoided.
3) Cut your losses:
Come out of the trade when you incur small losses. Don’t stick to that trade. If you do so, then it definitely damage your trading capital.
4) Avoid over trading:
Overtrading is one of the most dangerous common trading mistakes practices by traders. They buy and sell more to get more profits, but this often results in big losses and very poor money management. This will ultimately result in capital loss.
5) Don’t allow your profit run into a loss:
As soon as your trade becomes profitable, move your stop loss to lock in profits. In this way, the profits from the winning trades will never be drained out.
6) Follow the trend:
Trading against the trend is a common mistake. Always go with the trade, unless you are positive it is over.
7) Create a surplus account:
This is the most useful tip. When you have made some profits, place them in the surplus account created. Use them only in an emergency.
8) When you are in doubt, come out of the trade:
If you are not sure about the stock market position, then it is safest to exit with a small loss or guaranteed profit.
9) Diversify your risk by trading in variety of different markets:
Allocate your trading capital among variety of markets. This is the best way to manage your risk.
10) Avoid stagnant and volatile markets:
Try to avoid trading in stagnant and volatile stock market. These markets will result in bad fills. It will limit the moves and an erratic price movement usually goes against your position.
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