Many novice traders fail to recognise the importance of risk management, resulting in brief separation from their trading capital. The most important element of any trading system is not some new-age, fully optimized, wiz-bang pointer, rather than risk management. Traders must perform their profits, however, you must also check losses. Merchants control the loss of live to trade another day. Losses realized in any undertaking, however, successful businessmen and women manage Active these losses.
Before you can fully assess risk management must be quantified in order to give some perspective. An example consider three different traders. All begin with a merchant account of $ 10,000, and they are all relatively new to the stock exchange. As newcomers to say can manage only to collect profitable Professional 30% of the time.
Trader 1 manages to limit its losses of $ 500. The lucrative professions is double that of their losing TRADES ($ 1,000). Profits seem large trader compared with losses, therefore, seems insignificant in comparison. However, what this trader has failed to realize is that the result is a slow demise. Once this trader awakes to collapse the account lost at the point where it is no longer possible to trade virtually (i.e. position sizes offered are very small and are very difficult from brokerage rates).
Trader 1:
1: profit ($ 1,000), the account balance = $ 11,000
2: loss of ($ 500), $ 10,500
3: loss of ($ 500), $ 10,000
4: loss of ($ 500) $ 9,500
5: profit ($ 1,000) $ 10,500
6: loss of ($ 500), $ 10,000
7: loss of ($ 500) $ 9,500
8: loss of ($ 500), $ 9,000
9: profit ($ 1,000) $ 10,000
10: loss of ($ 500) $ 9,500
Summary of trade
Winning trades: 3
Loss trades: 7
Total winnings: $ 3000
Total damage: $ 3,500
NET:-$ 500 (injury)
This is a reduction of 5% in the capital
Dealer 2 reflects the actions most novice traders. The size of the damage is often similar to the size of the WINS distribution, and in many cases, the losses are often larger. Trader 2 is the same distribution with the same value for registration dealer 1 and closes the efficient distribution of the same value. The only difference between a trader and dealer are their approaches to risk management, hence their exit points in the loss of jobs.
Dealer 2:
1: profit ($ 1,000), the account balance = $ 11,000
2: loss of ($ 1,000) $ 10,000
3: loss of ($ 1,000), $ 9,000
4: loss of ($ 1,000), $ 8,000
5: profit ($ 1,000), $ 9,000
6: loss of ($ 1,000), $ 8,000
7: loss of ($ 1,000) $ 7000
8: loss of ($ 1,000) $ 6,000
9: profit ($ 1,000) $ 7000
10: loss of ($ 1,000) $ 6,000
Summary of trade
Winning trades: 3
Loss trades: 7
Total winnings: $ 3000
Total damage: $ 7,000
NET:-$ 4000 (loss)
This is a reduction of 40% in the capital
Trader 3 is probably a little more advanced than trader 1 and 2, and as a result, it is a little more savvy about the pitfalls presented by the environment of the Exchange. Trader 3 is currently experiencing a low point in his career trading, trading only 30% success. Trader 3 collections again exactly the same distribution as the first two traders, entering the same point and exiting identical for the profitable trade. Although this trader is not up to standard with stock selection, risk management procedures of the trader is still firmly in place.
Trader 3:
1: profit ($ 1,000), the account balance = $ 11,000
2: loss of ($ 220), $ 10,780
3: loss of ($ 216) $ 10,564
4: loss of ($ 211), $ 10,353
5: profit ($ 1,000) $ 11,353
6: loss of ($ 227), $ 11,126
7: loss of ($ 223), $ 10,904
8: loss of ($ 218), $ 10,685
9: profit ($ 1,000) $ 11,685
10: loss of ($ 234), $ 11,452
Summary of trade
Winning trades: 3
Loss trades: 7
Total winnings: $ 3000
Total damage: $ 1,548
Net result: $ 1,452 (gain)
This is a 14.5% increase in capital
It is important to note at this stage that the trader has made a profit last, only 70% of transactions carried out through them during this period, causing injury. All three merchants began with the equity and entered exactly the same and distribution, and has exactly the same profitable exits, even the first two merchants finished with red? The only difference is the latest retailer used the rule of 2%. In other words, don't trade should result in the loss of any more than 2% of your total capital. Looking at dealer 3 in the above table, it can be assumed that the trader was not prepared to lose more than $ 220 to trade 2 ($ 220 is 2% of $ 11,000-the total account balance at the time). Trader 3 refused to dragged from the market and exited positions once you hit stop-losses.
What is the main difference between the three traders? The difference lies in how they manage risk. 1 and 2 merchants lose money, however distribution dealer 3 becomes the same but returned a profit. Without risk management strategies, it is almost impossible to turn a profit to survive in market share.
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