Risk and Money management basics

Risk management is the theory of your commercial risk management to ensure that the trader is able to continue to trade through the inevitable bad times. There is nothing worse than the four consecutive losing jobs, and then on the right side of the market and have no commercial capital transactions in your account to benefit from this.

A strong risk management could make or break a trader success. Essentially, a trader with average trading system, but a strong risk management are likely to outperform a trader with a powerful system for trade and risk management system, poor or non-existent.

Commercial risk management on a similar principle operates as a diversification of investment Considerably, there are three areas for the management of risk:

Maximum loss per trade-or "loss" the reason for the expected victory in expected loss-position in the market ratioMaximum "profit/loss"-"Open" position

When combined, these three factors combine to form a merchant risk management, which will provide a positive edge in your trading.

A "stop loss" is an order that is placed, when inserting a trade, which will ensure you limit trader potential loss. For example, if you purchase at 100 and place a stop loss order to 80, the maximum potential loss is 20.

Stop loss orders are useful for three reasons:

Once started, the trader knows exactly how much money can be lost in any single tradeIt prevents "fall in love" with the trade of the trader and run with it despite the market move against the loss of braking positionA allows you to monetise the risk management system

As shown, stop loss orders are an essential component of risk management system.

The win/loss ratio is the core functionality of any risk management system.In fact, is the reason for the expected victory for a trade, the expected loss amounts for a trade.Form:

Expected victory: expected loss = profit loss ratio

For example, if a trader expects to win 100 bps for a trade, and are willing to risk 50 bps to trade, it is the ratio of profit/loss

100: 50 = 2: 1

This means that the trader is willing to risk the loss of one unit for two units of profit.

Trade Size is within the framework of the trade account and stop loss function is that of the trader is running in a trade if your merchant account is going to be worth $ 100,000, and the trader is willing to put $ 5,000 for each trade the size specified is 5%.

Transaction Size works on the theory of "risk to destroy."We all know that there is a risk in trading and that there is also a risk of loss of successive trade. "Risk to destroy "is the idea that the trader will stop by so many successive occupations that negotiating chapters will be wiped.

In the example above, maximum trade size 5%, the trader will need 20 consecutive losing jobs to wipe out there entire chapters dealing. While this is impossible, this is considered to be statistically "highly unlikely."

This puts together a simple risk management can be something like:

Does not exceed 10% of the merchant account to each asset risk does not exceed 5% of the merchant account each positionRisk marketDo do not take or professions related risk/reward the best of 2: 1

Simple, while the key to this system is to ensure that the trader is aware of how their commercial location sits with the risk management system at all times.

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