2 Reasons Why Risk Management Is King
In Forex Trading, Risk Management is not the most glamorous aspect of successful trading, but it continues to be the pillar of “long-term” success in trading.
A lot of newbies first come across technical analysis when they start learning how to trade forex markets. This is probably the biggest reason why most new traders blow accounts when they first start out.
But Risk Management is still one of the 3 Pillars of successful Forex trading. Technicals and Psychology are the other two pillars. But today, we’re talking about Risk Management.
Risk Management saves your @%$
Proper Risk Management will allow you to play the long game in trading. If you’ve spent any amount of time developing trading systems, you’ll know that time is your best friend in allowing the probabilities to play out and your edge showing returns.
But to get to that stage, you have to survive losses long enough to see those gains.
If the way you trade means that you see crazy gains, but you know that you can only take 2 or 3 losses before you blow your account, you aren’t properly managing your Risk.
A losing streak can and will happen to anyone that trades long enough. So you have to practice proper risk management so that you don’t lose all your money during a drawdown.
Well, how do you that? Risk an amount of your overall capital that allows you to take a few losses and still be okay. Read a little about Risk of ruin here if you’ve never heard of the term.
Once you understand how to preserve your capital, losses will get a whole lot less scary. You will be able to take losses and still trade next week and 6 months from now.
I know that sounds like a foreign concept to many new traders because they can’t seem to trade the same account for more than 3 months. We’ve all been there, trust me.
Proper Risk Management takes care of all of those problems.
It seems to pain many people to think about the worst-case scenario in their trading, which is a loss because the reason anybody starts trading is to make money, well, most people except for those who say it was always a passion which is just… beside the point.
Coming into an industry and expecting to make and being told to not focus on that but how to KEEP your money sounds so backward to many people.
You’ll find a lot of paradoxical concepts in trading, and that’s why some people throw in the towel after a while. “The way to go forward often is just knowing how to keep yourself from going backward.”
Risk Management ensures growth
Once you’ve taken care of not losing so much money all the time, the winning starts happening. If you have an edge, that is.
Once the winning starts, you can also use risk management to grow your account.
In the same way you would cut your Risk during a drawdown, you have to find a controlled method of increasing Risk when you’re on a winning streak.
Don’t get too crazy with this part and continue increasing Risk indefinitely, but a structured, consistent way of increasing Risk can help you just as well as cutting Risk when you’re down.
You’ll really have to give a lot of thought to this part because it will have to be specific to the way you trade, whether you add positions to an already profitable trade or use profits from a winning trade to risk a bit more on your next trade.
The kind of things you’ll have to think about when trying to figure this out is how do I define a limit?
Without this question, you’ll find yourself constantly pushing your edge and trying to hold out for that next winning trade that could make you a millionaire, and that’s not what this is meant to achieve.
This just helps your equity curve rise a little bit faster when you’re hot. But don’t make the mistake of thinking you’ll be hot forever.
Don’t bet the farm.
Don’t lose your shirt.
Cut the L.
Keep the W.