Risk Management

Stop Loss - is a loss limiter

Inability to comply with the risk systemleads to the loss of the deposit. Trader,who opens a trade without any fixed risk does not understand what is happening on the market, is not confident in his analysis and is afraid to put stop loss. He knows in advance that he's opening a losing position, but hopes that today his intuition won't fail him.

First of all, the price will start to develop against him, and he will average the position. After a while, if the trade was opened in the right direction, he will will be lucky and he will be able to take a profit, break-even or a small profit. This way he gets adrenaline and emotions, which is missing in his life. A huge percentage of loss that was just a short time ago, turned into a few percent of profit.

After a successful experience, the same thing will happen again sooner or later, he will rethink and identify the mistakes he made, and the next time he will try to avoid them. Regardless of his deposit the result at the distance will be the same - liquidation.

Big losses always start from a small ones, that was uncontrolled. They can be seen as a failure and are accompanied with a corresponding emotional and physical condition.

The benefits of many months of systematic trading can be wiped out in a few emotional trades.

You can make money by trading if you professionally manage your capital. Losses are the cost of doing business. You need to normalize the loss process and you need to normalize the process of losing and make it a habit.

Before opening a trade you should calculate the maximal loss and potential profit. This makes it possible to trade systematically and not to rely on a single trade. Priority is given to the result of open trades in a series of trades. One mistake per series of trades will not affect significantly on the overall result, and it won't change your emotional or physical state of mind.

Why don't traders use a stop loss?

• Lack of a theoretical base;

• Lack of a practical base;

• Desire to earn without loss;

• Naivety.

Where to place the stop loss?

The stop-loss should be placed where the set-up, on the basis of which the position is opened, loses its relevance. All instruments and setups have rules for the stop loss placement. To place a stop loss on the basis of intuitive abilities, unverified facts, psychological levels is not required.

Positions sorting

In many situations the future direction of the price may seem obvious, but there will be no reasonable place for a stop loss, or the risk/profit ratio will be unacceptable. Such trades should be to be skipped.

Each unprofitable trade must be carefully analyzed. Revealing mistakes that have been made is an essential process of improving the quality of future trades.

When the price activates the stop loss and reverses in the direction of the trade it is a mistake, an incorrect analysis of the market market situation.

When the price activates a stop loss and continues in the same direction - it's a setup mistake.

The importance of the stop loss

Trading without a stop makes a trader to constantly monitor the chart. This often causes problems with the psychological state, which affects their personal life and day-to-day affairs.

The desire for the price to go in the direction of an opened trade will minimize objectivity of analysis.

Increased emotionality for an uncertain amount of time and continuous thoughts about the market during the day, falling asleep and waking up, will categorically change life for before and after.

After liquidation, the trader's condition will get better.

Risk/Reward Ratio

Optimal risk and reward ratio allows the trader to make mistakes and be profitable even with a very low percentage of successful trades.

When you open a trade it is important to determine how much you are risking to get a certain amount profit.

A series of trades should be opened with an acceptable ratio of risk and reward. By trading with an optimal (RR) good setups, the trader has an opportunity to achieve a stable positive result.

The minimum ratio of risk/reward, which is recommended is 1/3.

When opening four trades, lossless is provided by the presence of one profitable position. When there is more than one, the trader makes a profit.

High RR

A high ratio of risk/reward would not be a good basis for a profitable trading for a beginner. It will be psychologically difficult to handle a series of unprofitable positions and the extremely low win rate, that will be in this system.

When opening trades with a risk/reward ratio of 1/10 the win rate for break-even should be 10%. Out of 100 trades it is enough to open 10 profitable trades, then the trader will be left with his own money.

Determining the appropriate (RR) ratio

Every trader has a different temperament and trading style. Determining the best ratio of risk and reward is determined by testing and weighing the pros and cons of each approach.

Optimal risk/reward ratio (1:3) - many trading opportunities.

Average risk/reward ratio (1:5) - average number of trading opportunities.

High rist/reward ratio (1:10) - few trading opportunities.

The percentage of profit will not depend on of the chosen system. Traders who trade with RR 1/3 can make significantly more than traders who trade with (RR) 1/10.

First of all, it is necessary to set the goal of reaching positive dynamics, the optimal and the average ratio of risk and reward will be the best option.

What happens to trading when there is a fear of making a loss

Fear of loss contributes to making decisions based on fear.

• Losing is inevitable - making decisionsbased on fear keeps the focus on the unfortunate outcome.

• Fear-based decision making contributes to trader's paralysis or inability to perform effectively.

• Capital managed by a trader who does not who does not know how to accept losses, cannot make a profit in the long run.

Profits are achievable in spite of reasonable losses

• A professional money manager understands that "losses are the costs of doing business"

• The use of smart capital management and high probability setups brings significant % of profits.

• Trading scenarios that contribute to potential risk/reward ratio of 3/1, provide an initial foundation.

• Identifying trading setups that provide a risk to profits 5/1 or greater - it is effective loss coverage.