Over the years in the industry, I have seen lots of different kinds of traders. Some have no idea what they are doing while others have even achieved some success. There have been traders that have great runs of profitable trading and their accounts grow in multiples. However, what often happens is that these traders end up blowing up their accounts. And often this happens pretty fast. First, they have a long run of profits and they suddenly lose it all. Why is this? Is it because they forget their strategy and start trading wrong?

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It could be that these shooting stars (traders that shine for a moment and then crash) decide to change their trading style and thus burn all the money they made. Or, perhaps their strategy was faulty. It made money under certain circumstances but then markets changed (e.g. volatility increased) and suddenly their strategy stopped working. I am, however, more inclined to believe that in many of the cases the root cause is a bad or non-existent risk management strategy. Maybe they use stops that are, say 8 ATR values away or maybe they just simply take too much risk per trade or per day. In other words, these traders (gamblers) are ignoring the best trading tool anyone can have: Risk management! 

Risk management really is there to ensure you are able to trade tomorrow and every day after it whenever your system signals a trade or your strategy sets up for new trade entry. When your risk-taking is appropriate your strategy will produce an economic benefit (profit) over the long run. Those that trade without stop-loss orders or take too big position sizes relative to their account size will not see a lasting economic benefit and will never realise their full potential as traders. They might get lucky every now and then but in the long run, they will fail. 

Traders should never bet the farm. If you are a new trader start by risking only a small amount of money per trade and once you see success, you can consider increasing your risk per trade. It is often recommended that traders should not risk more than 2% per trade as it allows them to trade 10 times and still the worst-case scenario is that they have 80% of their accounts intact. For a new trader, this might, however, be too much. You should consider starting with an amount that is way smaller than the industry average 2%. Maybe as low as 0.5% per trade. You can always increase the size when you see that you are successful. But at the same time, 2% might be too small a risk for a trader that is constantly successful. Traders with solid experience and stats to prove their success might consider risking 5% or even 10% when they have a high conviction trade setting up. The 10% figure though really is for the pros only. 

We all dream about making 300% or more per year but only those that work hard in getting better and always apply effective and disciplined risk management strategies can see their hopes fulfilled. Those endlessly drifting from one guru to the next seeking for the next sexy trading strategy (and most often limit their search to entry techniques only) are most likely to pay the highest price over their learning curve. They are likely to never develop enough to become consistently profitable. If these wanna be traders put the same energy into self-development and would get excited about risk management as much as they do about scammers’ marketing talk they might even achieve some success! Unfortunately, most people just simply don’t have the motivation to change their behaviour and are most likely to be those that keep on over-trading and trading without a written trading plan and stops.

You and I can be different though. We can choose to have a professional approach to trading and put risk management first. TIOmarkets is committed to helping you to learn and develop yourself as a trader. This is why I run free webinars on monthly basis. You can also find other education material at TIOmarkets.com Go to TIOmarkets.com/webinars to register for our next Live Trading Strategy Workshop for free. I will be there to teach you and share from my 20+ years of experience in markets and trading. Also, if you haven’t yet done so open a VIP Black account with TIOmarkets. You will get a great trading environment with tight spreads and no monthly subscription or per-trade fees. Register here: TIOmarkets.com

Trade Safe,

Janne Muta
Chief Market Analyst
TIOmarkets

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