Risk Management for Traders
Although risk management is a crucial and essential prerequisite for successful trading, it is often ignored by new traders. This is due to the fact that new traders fail to distinguish between speculation and gambling. With speculation, traders have some form of control over risk, whereas in gambling the casinos or bookmakers always hold the advantage. There are a few simple Forex Trading tips that novice traders can use when they start trading Forex.
Two forms of risk management are fundamental and technical analysis, both of which help traders calculate the chances of concluding a profitable trade.
In addition to calculating the odds of a successful trade, a trader needs to decide—before he enters a trade—at which point he’ll put out (the cut-off point, or the point at which enough profit has been made). The difference between the cut-off point and the trader’s entry point is the trade’s level of risk.
Traders can manage risk in a volatile market by incorporating risk limiting “Stop Loss” and “Take Profit” points into their trading strategies.
Stop Loss and Take Profit Points
Stop Loss and Take Profit points are essentially two sides of the same coin. A Stop Loss point is the price at which a trader will sell, at a loss, in order to limit his overall losses. A Take Profit point, on the other hand, is the price at which a trader is willing to sell for a profit. Using these tools in the planning of an investment strategy prevents greed from overwhelming our trading decisions.
The Bottom Line
As a professional trader, you should always know exactly when you are going to enter and exit a trade. Always remember to:
Decide on a Stop Loss Point in order to limit your potential losses.
Exit the market at the Take Profit point.
Analyze the market properly before placing your Stop Loss and Take Profit points.
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