Since the technical aspects of trading do not represent all you need to know, a deeper understanding is required. We’ve covered the topic of risk management in the past as well, but this time we’ll try to dig deeper in the world of risk management in order to help you out to improve your performance. The method that we’ll explain in detail below won’t make you rich overnight. Instead it can help you have a steady and increasing equity that can overtime, reach high levels.
Adjusting risks to your equity
You’ve probably heard of the 2% rule and if you have not, it basically says that you do not need to risk more than 2% of your account on a single trade. Seems fair enough, although some traders, especially the beginners need to risk less. Let’s assume you risk 2% of your entire account per trade and you encounter a series of losses. As you lose money, the account drops and if you are trading the same volume what happens is that without you noticing, you are risking more than 2%.
What you need to do in these kind of situations is to constantly adjust your risk and always calculate that 2% for the most recent account balance. By doing that after each loss you are reducing the amount you lose and after each win, since you are increasing the amount, you are increasing your profits. Using this method, you are maximizing your profits during winning periods and reducing your losses when the market does not go how you have anticipated. Is a subtle details but if you take this into account results won’t fail to appear.
Don’t fall into the trap most traders fail. Don’t get nervous after a loss and double your amount at risk. Understand that you will encounter losses, no matter how good you are. Learn to accept them and focus on the process. Avoid constantly chasing results and enjoy what you are doing at the present time. Hope we managed to open your eyes and you are now able to understand better the implications of risk management.