The following is an excerpt from the whitepaper The 10 Commandments of Risk Management for Traders. To download the entire complementary whitepaper, click here.
There are few maxims in trading held at all times and for all traders, but at least one concept will always be relevant to every trader. That concept is risk management. From a seasoned veteran to a brand-new beginner, every trader needs to know about and practice risk management if they don’t want to see their trading account get vaporized. The concept of risk management can be broken into smaller parts, and we want to do that today. Essentially, we want to help any trader walk away with a better understanding of what risk management is, why they need to apply it to their trading, and how it can transform their trading philosophy and skills.
1 | Only Trade Money You Can Afford to Lose
It is very tempting for new traders to dive into the world of trading as soon as they hear about it. They may expect that they can outthink the market and make profits no matter what. It is a great fallacy that many traders allow themselves to fall victim to. Sadly, when traders get out too far ahead of themselves and start trading with money that they cannot honestly afford to lose, things can get terrible quickly. The problem is that when someone trades with money they cannot afford to lose, their trading psychology changes. They become highly worried about losing money, and they don’t make wise trading choices.
People who trade money they cannot afford to lose often end up thinking about trading like gambling. They feel a huge surge of happiness when they win some wagers, but that happiness turns to anger and frustration when things turn against them. The swings in one’s psychology can impact how one trades in general, and things can get terrible for them in a hurry. Thus, it is necessary to consider all of the implications of your choices when you choose to trade beyond your means.
2 | Always Use Stop-Loss and Limit Orders
When you place an order as a trader, you send the broker instructions to place a trade on your behalf. They will follow instructions and attempt to place the order at the best possible price, but you might not get the price you see quoted or even the price that you genuinely want if you don’t set the order up as a stop-loss or limit order.
What stop-loss and limit orders do for you is set pre-defined limits for how much you will gain or lose on a particular trade. You want to set these up before you place the order, so you don’t change your mind in the middle of the trade. If a trade made sense at a certain price when you were thinking about it with a level head, then it shouldn’t change as the price movement comes into play. You will be much happier with your results if you stick to a pre-defined system that doesn’t deviate as the markets move around. Remember, there are a lot of bad things that can happen if you start to try to outguess the market.
Disclaimer: All information provided here is intended solely for study purposes related to trading financial markets and does not serve in any way as a specific investment recommendation, business recommendation, investment opportunity, analysis, or similar general recommendation regarding the trading of investment instruments. The content, in its entirety or parts, is the sole opinion of SurgeTrader and is intended for educational purposes only. The historical results and/or track record does not imply that the same progress is replicable and does not guarantee profits or future profitable trading records or any promises whatsoever. Trading in financial markets is a high-risk activity and it is advised not to risk more than one can afford to lose.
