We manage the risks of life all the time, whether it's while performing simple tasks (such as driving a car), taking out insurance or planning medical treatment. In essence, risk management is a story about assessing and responding to risk.
There are several reasons why a trading strategy or setup can be unsuccessful. For example, a trader may lose money because the market moves against a futures contract position or because players are exposed to emotions and sell assets due to panic.
Emotional reactions often cause traders to deviate from their original strategy. This is especially noticeable during bear market periods and periods of capitulation.
Most financial market participants agree that having a proper risk management strategy contributes significantly to their success. In practice, it can be as simple as setting Stop-Loss or Take-Profit orders.
A solid trading strategy should provide a clear pool of possible moves, meaning that the trader will be more prepared for all possible situations. As mentioned, there are many ways to manage risk. Ideally, the strategy should be continually reviewed and adapted to market conditions.
Below are a few examples of financial risks as well as a brief description of how to mitigate them.
- Have a personal trading strategy and know your systemic entry points.
- Trade with an amount you are comfortable with. Don't trade on borrowed and last funds.
- Take a break from the market. Take a break from the market, both when you have a series of profitable trades and when you have losses.
- Trade only by the trend.
- Not be guided by emotions. Not to fall into excitement. Do not think you are almighty.
Before opening a trading position or allocating capital to a portfolio, traders and investors should consider a risk management strategy. At the same time, it must be understood that financial risks cannot be completely eliminated.
Risk management is not just about how to reduce risk. It also involves thinking strategically so that unavoidable risks can be managed in the most effective way possible.
In other words, risk management is about identifying, assessing and monitoring risks according to context and strategy. The purpose of risk management is to assess the risk-benefit ratio to determine the most profitable positions.
Keep your nose to the wind and know that Fortune, Luck and Success
always favor you,
when you are with us!
Always yours C.J.
All the above is not financial advice, but only a subjective opinion of the author. If you doubt something, do your own research and double-check the information yourself.