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Risk & Money Management Trading Strategies Used By PROs (Only 1% Apply These...) - YouTube
Channel: The Secret Mindset
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Risk management and trading discipline usually
rank very low on the priorities list of most
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traders.
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In todayâs video I will share 10 tips that
will help you improve your trade and risk
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management and avoid the most common problems
that cause traders to lose money.
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1.
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Never use fixed stop loss orders
A common mistake is to use a fixed amount
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of points/pips on your stop loss and take
profit orders across different instruments
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and even markets.
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Markets move, sometimes erratically, sometimes
with high volatility without any notice.
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As a trader, itâs part of your duty to factor
this into your decision making process when
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deciding where to place your stop losses.
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You cannot just place your stop loss at a
set distance on every trade and âhope for
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the bestâ, that isnât going to work and
itâs not a viable strategy.
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You need to allow space for the normal âvibrationsâ
of the market each day.
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There is something called the Average True
Range (ATR) of a market that will show you
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the average daily range over any given time
period.
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This can help you see the marketâs recent
and probably current volatility, which is
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something you need to know when trying to
figure out where to put your stop losses.
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Trading with fixed distances doesnât let
you chose reasonable price levels and it also
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takes away all the flexibility you need to
have as a trader.
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Always be aware of important price levels
and barriers such as round numbers, common
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moving averages, Fibonacci levels or recent
support and resistance.
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2.
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Donât close trades without a good reason
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Have you ever exited a trade due to a fear
of giving back unrealized profits, only to
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see the market continue in the intended direction?
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Iâm sure you have.
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And if you havenât yet, you will.
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This is something every trader has to master
â the ability to control emotions in a way
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that allows you to trade based on pure technical
analysis.
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One way to keep your emotions in check if
you feel the urge to close a position early
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is to simply ask yourself, âwhy am I closing
this position?â.
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If your answer is anything other than a technical
one, you are likely making a decision based
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on emotions.
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3.
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Avoid moving your stop to break even to soon
Moving the stop loss to the point of the entry
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to create a âno riskâ trade is one the
best risk management strategies you could
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use.
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However, one of the most common and expensive
mistakes made by traders is moving the stop
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loss to breakeven too quickly.
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It is psychologically attractive to move a
stop loss to break even in order to enjoy
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the feeling of removing risk, but itâs not
a smart thing to do as it tends to result
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in being kicked out of potentially profitable
trade too early.
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So, when to move your stop to break even.
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Rather than moving your stop to an arbitrary
level, you should always aim to move it to
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a strategic level â one that the market
has deemed important.
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A very common approach usually involves waiting
for any of the following to occur:
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⢠A failed retest of the entry point
⢠A significant higher high or lower low
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that âconfirmsâ the entry
⢠A successful breakout in the direction
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of the trade
⢠A failed breakout against the direction
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of the trade
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4.
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Understand market correlations
Another tricky component to risk management
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is the ability to control exposure with correlated
trades.
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When it comes to money and risk management
this means that trading instruments which
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are positively correlated will lead to increased
risk.
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If you are a forex trader, you can often see
a very strong correlation between certain
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forex pairs.
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If you are a stock trader, you will notice
that companies within the same industries
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and sectors often move together over long
periods.
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For instance, you spot a rising channel on
GBP/USD and you decide to set a buy order
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at the bottom of the channel.
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At the same time, you also see a bullish divergence
on GBP/JPY, so you also decide to take that
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trade.
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When these trades are opened, then you will
have 2 correlated trades that could either
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double your win potential if the pound keeps
rallying or double your losses if the pound
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suddenly sells off.
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This is why it is essential to avoid opening
positions for highly correlated instruments.
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Understanding how the various instruments
relate to each other and why some instruments
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move in tandem while others diverge, allows
for a deeper understanding of the market exposure.
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5.
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Understand the impact of leverage on risk
management
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Leverage is simply a way of trading with more
money than you actually have in your account.
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Now using leverage can maximise gains, however
it can also increase losses too.
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If you are leveraged and you make a profit,
your returns are magnified very quickly but,
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at the opposite side, losses will erode your
account just as quickly too.
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And too many people have lost their entire
trading accounts by the mis-use of leverage.
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Remember, the greater the amount of leverage
on the capital you apply, the higher the risk
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that you will assume.
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Selecting the right leverage level depends
on your experience and risk tolerance.
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If you are conservative and donât like taking
many risks, or if youâre still learning
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how to trade, a lower level of leverage like
5:1 or 10:1 might be more appropriate.
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So familiarize yourself with leverage trading
and remain conservative as you learn how to
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trade and build experience.
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Keeping your positions small and limiting
the amount of capital for each position is
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a good start to learning the proper way to
manage leverage.
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⢠it provides a place where you can come
back to and revisit all your past trades,
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to see what you have done (wrong) and how
you developed over time.
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⢠it will keep you from making mistakes
during your trading sessions.
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6.
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Keep a journal and review your trades
Most traders will never look at their trades
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again after they have closed them.
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They will just move on to the next trade,
forget about what they did before and completely
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avoid learning effects.
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Keeping a trading journal offers two potential
benefits.
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First, it provides a place where you can come
back to and revisit all your past trades,
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to see what you have done (wrong) and how
you developed over time.
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And second, it will keep you from making mistakes
during your trading sessions.
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At the end of each week and month, go back
and see what you did, notice common problems,
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and spot your strengths.
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These observations can help you exploit your
strengths and highlight the areas you need
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to work on.
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The journalâs objective is to monitor both
the performance of your trading strategy AND
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your ability to execute it with consistency.
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When you reflect on your entries after a month
of trading, I assure you that youâll learn
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a lot about yourself and about your trading
psychology.
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7.
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Give a stop loss room to breathe
Most traders misunderstand what a stop loss
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really is.
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At its core, the price level of your stop
loss order is the price where your trade idea
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is no longer valid.
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Now, placing stops too tight is one of the
most common mistakes traders make.
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Many traders are naturally drawn to and tempted
to place as small of a stop loss on their
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trades as possible.
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Admit it..how many times have you been right
about a marketâs direction, your trade signal
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was right, but you still lost money somehow?
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This keeps happening to you because your stop
loss is too tight!
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The market can fluctuate unpredictable, and
if you place your stop too tight, there is
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a high chance that youâll be stopped out
before the price continues to go in your direction.
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Itâs important to give the price enough
room to âbreatheâ.
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And of course, position sizing plays an important
role in this equation.
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8.
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Have a trading rules checklist
A checklist has similar benefits compared
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to a trading plan, but it serves as a great
complimentary tool.
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A checklist must state all your entry criteria
underneath each other.
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And every time you are about to enter a trade,
you revisit your checklist and check off the
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things you can see on your charts.
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With a checklist, it becomes obvious right
away if a trade really matches your criteria
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or not.
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Again, if you can visually see that the trade
that you are about to take is breaking your
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rules and that you should be staying out,
you are more likely to avoid those painful
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mistakes.
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9.
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Have realistic take profit targets
Many traders put way too much emphasis on
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having higher take profit levels and donât
understand that this does not tell you anything
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about the quality of your strategy.
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You end up setting unrealistic profit targets,
far away from your entries, thinking that
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by using a wider take profit you can increase
your reward risk ratio.
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But, itâs not as easy as that.
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Using a wider take profit order means that
price wonât be able to reach the take profit
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order as easily and if your stop loss strategy
isnât on point, you will most likely see
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a decline in your winrate.
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You need to be able to determine a suitable
profit targetâ one that gives you a realistic
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profit target, but also gives you a sensible
risk to reward.
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There are many ways in which you can set your
profit target using technical indicators and
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other tools â but two of the most effective
ones are support and resistance levels and
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daily range levels using the ATR indicator.
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10.
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Understand your Fears in Trading
Every trader, no matter how experienced or
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inexperienced, faces the same fears.
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In order to manage your trades and become
consistent, you need understand your fears.
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Maybe you get anxious when you are in profit,
and feel the urge to close the trade.
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It means you have the fear of profits becoming
losses.
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Or instead of listening to your analysis,
you fail to pull the trigger because you fear
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that you have missed or overlooked something.
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Thatâs the fear of mistakes.
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Or maybe you have the fear of being wrong.
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Thatâs when you experience a few successes
in trading, and you start to develop an ego.
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Then, instead of making the trade that can
make you the most money, you make the trade
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that best protects your ego.
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Or you suffer from FOMO, the fear of missing
out, when impatience and greed take over and
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you enter the trade just because you feel
the market is moving without you onboard.
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You must know yourself and understand the
fears that appear inside your mind when youâre
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trading, because this is the first step towards
conquering these fears and becoming a better
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trader.
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As always, if you learned something new and
found value, leave us a like to show your
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support, subscribe to our channel and click
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Until next time.
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