What Is Risk Management In Trading

Is your trading account suffering from losses due to a lack of Risk Management in trading? Do you get emotional during the trade and feel like giving up on trading? Well, in today’s article, we are going to understand the importance of risk management in trading to protect your trading accounts and get steady returns.

You must have heard that 90 to 95 percent of people who trade in the markets end up on the losing side. This may happen due to many reasons, but the primary reason overshadowing all the other ones is very poor or no risk management in trading. Often, traders fail to understand the importance of risk management in trading.

Generally, traders want excellent trading systems, but they fail to recognize that an excellent trading system with poor risk management in trading is of no use because every trading system has its pros and cons. You will come to know the importance of risk management in trading as you read below.

There are 3 Main Important Aspects of Trading-

Trading System- trading system includes the technical abilities of the trader, such as price action, chart-reading, or whichever trading strategy you choose.

1. Risk Management- This includes risk per trade, position-sizing, stop loss planning and planning the profit levels.
2. Trading Psychology– Trading psychology includes the mental aspect of trading, such as emotional control, patience, etc.

These 3 aspects are interconnected in such a way that if one of them is missing, the other two eventually make no sense. For long-term success in trading, these are the three important qualities that are essential.

Today we will discuss the importance of risk management in trading, which is the most crucial aspect of these three. Because if you are failing to manage your money, then you will not have the right trading psychology, and as we discussed earlier, an excellent trading system with poor risk management in trading is useless.

So, before starting to trade with real money, you have to plan your trade by keeping these things in your mind.

How to Implement Risk Management in Trading?

Until now, we have understood the importance of risk management in trading, and now we will learn different ways to implement risk management principles-

1. Risk to Reward Ratio- It is the ratio of the total risk of your capital to potential reward on a single trade. If the risk-reward ratio is less than one, then it doesn’t make any sense. Look for a trade which has a risk-reward ratio greater than one. If you are getting a trade with a risk-reward ratio of less than one, leave that opportunity and wait for another one.
2. Setting Up The Stop-Loss- stop-loss placement is the key factor while planning your trade because it determines your position sizing, and position sizing is nothing but how you control your risk.
3. Position Sizing- position sizing is nothing but determining how many lots or contracts you are trading during a single trade. The distance between the stop-loss and entry point, combined with the position size, decides the amount of money you are risking on a trade.
4. Setting Up The Targets- You have to set the target levels logically. There are multiple ways by which you can place your targets, like previous support and resistance, daily market range, etc.
5. Psychology of The Trader While Exiting The Trade- Do not get emotionally attached to your positions, cut your losses at predetermined levels, and follow your trading plan.

So this is how you can implement risk management in trading. I hope that through this article, you were able to understand the importance of risk management in trading and how you can implement different risk management principles in order to protect your capital.

If you want to know more about Intraday Trading Strategies you can refer to our previous blog on 10 Best Intraday Trading Strategies.

Happy Learning! Booming Bulls Academy