When you begin to look into trading it’s likely because you see you might be able to make money doing so. Well of course you could make money, but you could also lose money. To be honest you’re more likely to lose money then make being a beginner. So one of your main focuses should be how do you protect your capital. This is called risk management, I’ll be explaining how risk management could work swing trading the stock market. Ill also be explaining how risk management could work in the forex market.
Stock market risk management
So lets talk about stocks, Specifically swing trading stocks. When you’re swing trading in the stock market your biggest enemy is greed. Risk management doesn’t involve greed so before even learning how to proper manage your account, try to be realistic with your position sizes. Being realistic with your position sizes leads us to our first subject we’ll be talking about. What I mean by be realistic with your position size is never put all your eggs in one basket and never put more capital into a position then you want to lose. You’re most likely not going to get rich loading all your capital into one position, Just isn’t likely unless you have a whole lot of capital to throw at it. From a small accounts point of view which in the stock market world basically anything under 20 grand is a small account. We trade for longevity not to get rich quick your position sizes should take up no more then 5-10% of your account and that’s at the high end. For example if you have $1000 your position sizes shouldn’t be more then $100 per position. The safest bet if you’re $1000 account is to spread your money around $50 a position, $100 on a position that looks good. The reasoning for this is because you want to have multiple positions open and be able to open more position if an opportunity arises.
Don’t put all your capital into the market. This may not sound like risk management but if your capital isn’t active it isn’t losing money, But that not the reason to have free capital completely. Like I was telling you guys be in multiple positions but keep something free for the simple reason your open position may tank. And if they do you don’t want to be a bag holder, Now this is where things could come together for you and you’ll see how proper risk management could help. Out of your $1000 you have $600 in the market, Lets say that’s 12 different positions this means that’s 12 chances to possibly get a return on your investment. Two of your positions tank hard by 50%, Now you have a choice close the positions with a 50% lose remember each position was only $50 so if we closed the two position we would lose $50 that would be a $25 lose on each one. There is other alternatives though you have free capital you could double down if you feel the stock may come back or simply hold maybe find a different position to enter that could offset the loses. Even in this scenario you’re still not worried because your other ten position are up or quite possibly winning trades.
Don’t ever be scared to close a position and take profit or take a lost. How this relates to risk management is you may hold to long and give the market back all your profits in a winner trade. Alternatively you may hold to long on a losing trade and give the market you hard earned cash. If your take profit is close nothing wrong with taking profit doesn’t have to hit it exact every time and if your position is at an uncomfortable level for you its fine to close maybe open a new position on the stock at a better price. Always stick to your plan and don’t let greed take over, might be hard when your in a position and its pumping let it pump but when its done take your profit. Greed can make or brake you its no room for it in your trading plan.
Have a trading plan, when ever you enter a market you should have a trading plan. your trading plan will likely be the biggest part of risk management because your trading plan should be planned around risk management. What a trading plan can consist of is how much are you willing to pay to enter a position, how much are you willing to lose if things go side ways, where to enter your trade what’s a good price point for you, a proper exit plan how much profit is good enough for you with out being greedy, how are you going to screen the stocks before you enter a position. Its more thing to look into but those where just a couple of thing to think about when you start to make your trading plan.
Before you enter a position you should always have multiple reasons beyond you think its going to go up, or because such and such said I should buy in. Its thousands of companies traded on the stock market everyday and each stock represents a company if you don’t think the companies going to do well don’t even trade. Yes it’s a difference between trading and investing but use investment knowledge to choose the stocks you trade. Don’t trade shitty companies just because a companies new doesn’t mean its shitty but if the numbers looking pretty shitty stay away from it even if your technical analysis says hey this ones going up, That maybe more of a reflection of the traders in the market over how well the companies actually doing. If you’re wondering how this relates to risk management, Ill tell you. Its because we don’t want to be a iffy position doing the proper DD even on a swing trade is essential to your success and if you don’t think so look at how many people recently blew at least half there account and some becoming major bag holders. Don’t be a bag holder be a bag getter do the proper DD and us your risk management skills to make you some green.
Forex risk management
Lets talk about forex risk management. Now forex risk management is quite a bit more complicated then the stock market. You can easily see what’s your risking in the stock market, But in the foreign exchange market you might have to go search for a pip calculate and really pay attention to what you’re doing. The movements in the forex market are called pips and 1 pip equals up to what ever lot size you choose on your trade. A lot size is the amount of money your trading in the market. Your preferred lot size determines how much a pip with payout or take away from your position. In the forex market you could buy or sell an asset dependent on if its going down or going up. If you believe its going up you buy if you believe its going down you sell.
That’s the basics of how you make money in the forex market but the aim is to keep the money you made that’s what risk management is for. The first thing you’ll need is a trading plan. This a business so you want to come in prepared and a trading plan is your first weapon to prepare and your most important. Like I told you in the stock market risk management part your trading plan should be your risk management and in the forex market you need a trading plan. I repeat you need a trading plan. Trading psychology is another factor you’ll have to over come, how trading psychology factors into risk management is how much draw back can your heart take. Or to say it simply what’s your risk tolerance to figure this out along with practice your trading plan stick with a demo account for a while. if you can make consistent profits in your demo you could likely make consistent profits in the real market, But you have to treat your demo like a real account. Have a realistic amount of money in your demo if you’re not starting with $100,000 you shouldn’t be trading a $100,000 demo account, If you plan to start trading with $2000 have a demo account with $2000 in it. Because trading your demo account with a large amount of money isn’t going to help you in the long run and will fool you in the short run. It’s simply easier to make money in this market with more money and that’s the reality of things. Don’t expect to come in with $500 and make $10000 in two weeks. You might but without risk management you’re more likely to blow your account then anything.
How you should look to manage your forex account, First of all don’t look to the moon greed will destroy your account quick in this market and if you want to make money you have to have money. I would recommend you use your account as a savings account stack your money up slowly until you have at least $2000 practice your strategy on a demo account in the mean time. Study hard read books YouTube is ok but if you’re using YouTube you’re better off just getting an explanation or listening to a book. You should only be risking 1-2% of your account at anytime, for example with a $2000 account you should only be opening trades around 0.02-0.03 lot size. Now people that’s been watching YouTube gurus might be looking like “But you wont make any money” you can if you’re trading correctly. Yeh you could open a trade with a higher lot size maybe but I wouldn’t recommend it if you’re new you should always look to preserve your capital. A 0.01 lot size moves $0.10 a pip so if you’re using a 0.02 lot size you’ll be risking $0.20 a pip, While that doesn’t sound like a lot it can add up quickly especially if you’re losing.
Lets add margin into the mix, Now your margin level will determine how many trades you can open depend on your lot size and capital amount. But its more to margin it also connects to your lot size. For example if you open a trade with your $2000 account with a 0.02 lot size you likely be using around $25-$30 in margin. Margin is something you could barrow from to enter a position, But musk be paid back at some point of time. Now margin in forex works this same way when your opening that 0.02 lot you’re barrowing $200,000 from the bank. Don’t worry you don’t have to worry about the fact that you’re technically barrowing money from the bank it doesn’t exactly concern you. The biggest concern you should have is not filling up that margin level you’re playing with fire when your close to a margin call. The best way to avoid being margin called is proper risk management, A margin call can close all your unprofitable positions and brokers don’t have margin protection. Meaning that they might let you go so negative that you don’t have any money to pay for the loss and end up owing the broker. So when you’re looking for a brokerage make sure it has margin protection to avoid owing the broker.
Always have a sound entry and exit plan or a take profit and stop loss. What a take profit does is close out your trade a your desired profit level, what a stop loss does is close the trade at a desired loss level. Make sure to pay attention to time important news that’ll effect the market will hit, Don’t want to get pushed out of the trade to early and loss before the movement happens. All the points I’ve mentioned should be in your trading plan and more like i said earlier your trading plan is your risk management in a sense. So don’t come in the market unprepared and don’t come in the market with a heart full of greed. The foreign exchange market will rip you to shreds if you think you can come in and just trade with no knowledge or no plan. Be smart trade for the long run and invest for a longer run.