Risk & Money Management

Introduction

This course is designed to help traders fine-tune their trading strategies in order to ensure a more successful trading journey.

Risk and money management is an important feature of online trading. Even the most experienced and successful traders use them. Some even argue that it is because they use them that some traders are so successful. Correctly managing capital is essential for everyone in everyday situations, but even more in online trading. As with any form of investment, taking risk is unavoidable in online trading, but with a good risk and money management strategy, a trader can effectively reduce risks to an acceptable level.

Initial Investment

Risk & Money Management

Risk and money management starts even before you start actively trading. A trader must decide how much money to invest in his trading venture.

And this initial investment does not only include the money he will actively use to trade, but he also has to cater for other associated expenses.

These could include:

  • Learning courses
  • Special indicators and other higher-end charting softwares
  • Instantaneous, accurate news feeds

That being said, online brokers such as Markets.Online provides traders, more specifically beginners with all the tools they will need to have a successful trading journey, effectively reducing the initial investment required.

However, traders must consider that one of the main reasons they fail in trading is undercapitalization!

Drawdown

Simply put, drawdown is the decrease of a trader’s capital after he has lost a series of trades. The drawdown of a trader is the difference between a relative peak in capital minus a relative low.

Risk & Money Management

All traders will go through periods of drawdown at one time or another during their trading career; however, only good and disciplined traders will survive those periods and emerge successfully.

Having sufficient capital is of the utmost importance to withstand a streak of losing trades as is being disciplined and follow a trading strategy.

Risk per trade

Risk & Money Management

Before starting their trading journey, traders must decide what is the maximum percentage of their capital they are willing to risk on each trade. Once they have reached a number, they should stick to it.

According to many experts, 2% is the magic number. This means that traders must only expose 2% of the available capital on trades. However, this is not an absolute rule per se and every trader must find their own risk per trade.

Stop Loss and Take Profit

Risk & Money Management

Once traders have determined all the above and are starting to trade actively, one of the most efficient tools at their disposal is the ‘stop losses’ and ‘take profits’ options. These can be set while placing a trade order.

Stop losses are measures put in place to make sure traders do not lose all of the money they invested in a trade.
Take profits are measures to ensure that they do not miss an opportunity to make a decent profit from a trade.

We will elaborate more on all these topics in the coming lessons of this course.