Education

3 risk management tips you need to know

By Paul Reid

21 March 2024

risk management

Are you looking to turn current economic volatility to your advantage? With raging inflation and unpredictable interest rates, the current economic landscape might seem daunting. And yet, it presents a unique opportunity.

Trading with risk management allows you to capitalize on economic trends with the aim of supplementing your income.

When the value of your hard-earned money is at the mercy of inflation, Exness offers a gateway to not just preserve, but, potentially grow your wealth. Online trading has emerged as a beacon for savvy investors looking to navigate the turbulent tides of the global economy. But to succeed, one must not only have access to the right tools but also the wisdom to use them. That’s where risk management becomes your ally in the quest for trading success.

Imagine employing strategies that professional traders use to manage risk and achieve consistency. With Exness, you can apply these very tactics:

Position sizing 

Mastering Position Sizing ensures you're never overexposed on a trade. It's the savvy trader's method to manage potential losses while aiming for optimal gains.

It’s about determining the volume of a trade. Rather than a one-size-fits-all approach, you calibrate the size of your position based on the specific risk you’re willing to take for each trade.

Let's say you have a $1000 trading account. Adopting a 1% risk per trade policy means you’re risking $10 on any single move. If the stop-loss is $1 away from your entry point in a stock trade, you can buy. This size ensures that if the stop-loss is triggered, you only lose $10, exactly 1% of your account, safeguarding your capital from a significant drawdown.

Position sizing isn't just about minimizing risk—it's about optimizing your potential for profitability. By scaling your trades to the appropriate size, you maintain control over your portfolio's exposure to market movements, whether you're dealing with stocks, forex, or any other asset. This approach enables you to weather the storms of volatility and stay in the game for the long haul.

Stop loss and take profit orders

If you ever want to get a good night’s sleep, Stop Loss and Take Profit are a must-have.

Stop loss (SL)

Set an SL to automatically exit a position at a pre-determined price, minimizing potential losses. For stocks, place SL just below key support levels or use a fixed percentage of your entry price. In Forex, base your SL on currency volatility. Consider using the Average True Range (ATR) indicator for guidance.

Take profit (TP)

Conversely, TP orders lock in your gains by selling once your profit target is reached. For stocks, aim near historical peaks or set a goal of a 10-20% return. For Forex and commodities, align TP with pivotal market levels or a favorable risk/reward ratio.

Calculating the perfect spots for SL and TP is straightforward. Use a fixed percentage of your investment to define the SL and set the TP at a point that offers a risk/reward ratio that matches your strategy, like 1:2. For instance, in a Forex trade, if you have $10,000 and don’t want to risk more than 1%, you'd set SL 50 pips away with a $2 value per pip. This sets you up for a potential $200 gain if your TP is 100 pips away.

Adapt these practices to fit the unique volatility of the assets you trade, and remember, regular strategy refinement based on market trends and your personal experience is key to ongoing success.

Risk/reward ratio

Harness the power of the risk/reward ratio to make calculated and strategic trading decisions:

Risk/reward ratio explained

This is the balance scale of trading, comparing what you're willing to lose (risk) against what you aim to gain (reward). It's a critical metric that guides traders in identifying positions that are likely to be profitable.

Practical application

Assume you're eyeing a stock at $50, foreseeing a rise. You set a stop-loss at $45 to protect against a drop — that's a $5 risk. You anticipate the stock could rise to $60, a potential $10 gain. This gives you a risk/reward ratio of 1:2 — for every dollar at risk, you expect to double in potential reward.

Strategy benefits

By seeking out trades with a favorable risk/reward ratio, such as 1:2 or higher, you position yourself in scenarios where the wins can more than make up for the losses. Even if not all trades are wins, those with higher reward potential can offset the losses and lead to an overall profitable trading strategy.

This ratio is a cornerstone of disciplined trading, ensuring that your trades are not just gambles but calculated risks. With a solid risk/reward framework, you can approach the markets with confidence, knowing your strategy aims for sustainability and growth.

Conclusion

Now is the time to take control of your financial destiny. Sign up with Exness today, and you’ll be joining a community of traders who are empowered with top-notch analytics, user-friendly tools, and the knowledge to use them. Whether you’re looking to supplement your income or set the foundation for a new financial path, Exness is your partner in this journey. Open an account now, and let’s embark on a quest to harness the economic currents and sail toward prosperity.


This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.


Author:

Paul Reid
Paul Reid

Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.