“For every action, there is an equal and opposite reaction”
I’m sure you’ve heard this Newtonian law before?
This is a scientific truth, but when it comes to trading there is a way that you can bend the rules to your advantage.
There is a way that you can go against the laws of nature, lose more trades than you win, but still end up profitable.
You can make 10 trades, for example, lose 7 but still end up in a profitable position.
Sounds great, doesn’t it?
This article shares a few ways in which you can manage your risk whilst trading.
Rule #1 of risk management
Never, and I mean NEVER, trade without a stop loss.
For those of you who don’t know what a stop loss is – a stop loss is an automatic order we raise on our trades. This automatic order tells the market to exit you at a particular point if the market moves against you.
For me, this is the number 1 rule in trading.
Every time I speak to someone who has attempted to teach themselves to trade, they always have a story about how they messed up their risk management and lost a lot of money, if not an entire account!
A stop loss is how we protect our capital.
Remember – uneducated traders are dangerous traders.
Rule #2 of risk management
The second most important risk management rule, for me, is to never risk more than 1% or 2% of your account per trade.
Think about it, if you’re only risking 1% of your account per trade, you would have to lose 100 trades in a row in order to wipe out your account balance to £0.
The likelihood of this happening is tiny.
For this to happen you would have to be the unluckiest trader in the world, or the dumbest…
Rule #3 of risk management
Next up, the minimum you should be aiming for on any trade is a risk to reward ratio of 1:1.
What does this mean exactly?
It means that if you are risking £100 you stand to make a profit of £100 as well.
Ideally you want to be aiming for more than 1:1 as a 1:1 risk to reward means that if you win 50% of the time then you are still only operating at breakeven.
This is really important to understand – the more you increase your risk versus reward, the more losing trades you can afford.
It might be easier for me to explain this using the findings of a recent report…
In this report, conducted by one of the largest forex brokers in the world, they revealed that around 90% of retail traders (individual traders trading their own money) were losing money. Only 10% were making any form of profit.
Notably, they also reported that the 90% were actually operating with a good win/loss percentage, meaning they were having more winning trades than losing trades.
The problem was that their winners would win less money than their losers would lose money.
Read that sentence again. Does it make sense?
This is how we can really start to tilt the odds in our favour.
Rule #4 of risk management
Finally, I believe one of the riskiest things you can do is to do nothing.
This applies to trading, as well as life more generally.
The riskiest thing that I could have done, for example, would have been to not learn how to trade and rely solely on the income from my job in retail.
This fact really hit home a few years ago…
At the time I was in South Africa teaching trading and taking a well deserved break in a bar with my mentor.
All of a sudden my face turned completely white and my mentor asked what was wrong.
What had happened was that I had caught a glimpse of the TV and showing on the screen was BBC News and they were filming my old offices from when I worked in retail.
As I watched, I could see my ex co-workers walking out holding brown boxes after being made redundant.
And it gets worse…
Not only had they lost their jobs, but the man who owned the company, a man named Sir Phillip Green (no longer a Sir, due to this), had stolen their pensions as well.
It was devastating to watch but it made me even more determined to help others, just like you, to learn to trade.
So, how can I help you?
My primary goal now is to help others achieve what I did through trading and attain financial freedom and an improved quality of life. This is why I’ve spent years fine-tuning the STARTrading Method.
To find out more about this approach, and to get a feel for whether or not learning to trade is for you (it is, by the way…), I’d love to invite you to one of our upcoming live events.
During these events I provide an in-depth breakdown of how to implement the STARTrading Method, uncovering how you can learn to trade successfully using just 30 minutes per day.
Seriously, just 30 minutes!
It’s a major misconception that you need to be glued to your laptop all day to become a profitable trader.
That couldn’t be further from the truth.
Don’t believe me? Join me at an upcoming event to find out more.
Remember – doing nothing is a risk in itself…