Importance of Risk Management - let's talk about it againIntroduction
We all hear from everywhere about risk management. They all say the same: “It’s important, it will help you to protect your capital, etc., etc.” But today I wanted to talk to myself about risk management in more detail. And I’m sure I will have a much better understanding of practical risk management in forex after this - I will talk through its psychological aspects, about RM role as the main principle of trading. I will do it in “talking to myself” format to remind myself in the first place about how important risk management it.
Don’t be fooled by the simplicity of risk management.
Unfortunately, risk management in FX is too simple. Dangerously simple I would say.
In its basic form, good risk management means risking 0.25%-1% of your account per one trade. That’s it. Just do that and most likely you will have an unbreakable account for at least several months.
Yes, of course, you can have a drawdown due to emotional trading or revenge trading or whatsoever. But because you will have good risk management, I will have so much time to stop trading emotionally, I can even take 10 revenge trade or 10 absolutely random stupid trades - and your capital will still be in place, even if you will lose every and each of these 20 trades.
I ask myself the question - how do people blow their accounts? Very often it happens in 1-5 days of bad, emotional trading, even if the whole months before was good. I’m talking from my experience though, and I don’t know - maybe everyone else is good as their risk management.
So why really it happens? In the first place because of bad risk management. Not because of the strategy, not because of the market acting randomly and not in my favor. Because I don’t want to have a simple yet powerful rule of risking 0.25-1% per trade. I start to complicate things and want to risk 5-20% at first, to gain some profits, and only THEN I want to implement good RM. Theoretically, it’s possible, yes, but in reality, I lose my mind and blow my account. So don’t be fooled by the simplicity of RM - because it’s not easy. Because it’s not easy to control yourself while facing a possibility of doubling your account in 1 day and to stay calm and even indifferent to it.
Always remember, Risk Management is the #1 rule, you can't control the market, but you can control your risk management. Stay calm and risk 1%.
Trading is a survival game. RM is the foundation of any strategy, risk management is the most important part of any strategy and step #1. Stay calm and risk 1%.
Jesse Livermore said: "If you cannot sleep because of your stock market position (you are weak), then you have gone too far. Reduce your positions to the sleeping level." Stay calm and risk 1%.
