No opportunity comes without risk and all traders, even the most successful ones, will lose money on numerous occasions. However, losing or missing out on an opportunity isn’t the same as wiping out your capital in a single transaction or investing money you can’t afford to live without. This is where risk management comes in. Experienced traders use risk management techniques because they acknowledge that you can’t always win, and you should follow in their footsteps.
In previous lessons, we discussed some broad risk control strategies, e.g. we discussed the important of understanding macroeconomic decisions and how they make affect your assets, and we also covered the importance of being realistic about how much time you can dedicate to trading . If you can’t monitor the market regularly, you should steer away from short-term trading, which requires rapid entry and exit, and focus on medium to long-term positions instead. If you don’t care about the market at all, you should consider investment as opposed to trading. The former implies you’re building a portfolio over time that includes different assets, which you could actually own, whereas trading is more about frequent buying and selling based on speculation about the price movement of assets.
Traders use a number of techniques, some of which don’t require professional training. In fact, we’d argue that most risk management strategies are common sense but trading isn’t just about figures and data. Emotion is a huge part of decision making and you may act based on greed or hope, rather than objective criteria. So, risk management is also about controlling your feelings when your money is on the line.
So, risk management isn’t about limiting opportunities or being pessimistic. It’s about accepting that loss is inevitable and embedding this principle in your trading strategy.
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