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Novice traders skip the topic of risk management or study it fluently without paying due attention in an effort to enter the market as quickly as possible and start earning. But a successful trader must calculate the moves in advance and focus not only on the question “How to make money?”, but also “How to keep a deposit?”. We will tell you what risk management is and how a trader can build a trading system on the stock exchange effectively.
What is a risk management in tradingTrading on the stock exchange entails risks from high market volatility. It is worth thinking about potential losses in advance in order to save the deposit and get a profit from the first transactions. It is important to understand what risk management is. The definition used by experienced stock market players is: “Risk management is the rules necessary to describe the choice and size of the maximum sweat, a series of investor actions in case of losses.”
In short, risk management is the answer to the question “How much can I lose on a trade?”. A trader understands how to build an effective trading system and safely manage capital by answering this question. The principles of risk management should be clear and unambiguous so that in any stressful situation the player can make the right decision quickly.
In search of an answer to the question “What is risk management?”, it is worth examining all possible risks. There are several of them:
- For deal. This is the acceptable risk per trade that a trader can afford. At the beginning of the journey the player chooses small transactions in order to understand the mechanism of the market and gain experience. As experience is gained and positive statistics are accumulated, the risk can be increased. This means that with an increase in the deposit, you can lay a larger percentage on the risks. The maximum recommended risk per trade is 1% of the deposit. Such losses will not create tangible stress and will allow the trader to adapt to the rapidly changing market trends painlessly.
- For a day. This is the maximum loss that a trader can afford in one trading day on the stock exchange. Do not put more than 5% of the deposit at risk. This tactic will allow you to stop in time if trading on this day is unsuccessful.
- Risk for a week. This is the maximum loss of a deposit for a week, and it can be up to 10%, no more. If the market trend has changed and you are incurring losses after reaching the risk for the week, it is worth stopping for a few days and reconsidering tactics.
- For a month. This is an allowable loss for a month and should not exceed 20%. A trader may face such losses at the beginning of a crisis period in the market, when the volatility is the highest.
- Maximum risk. This is the largest allowable loss of the deposit that you can afford within the framework of the chosen strategy. It is recommended to keep the maximum risk within 30%. If the indicator is higher, losses can affect your psychological state negatively, reduce motivation and performance.
Steps to build an effective risk management system for a trader
We have reviewed what risk management is, described all the types of risks that are worth remembering briefly, and now we offer you some effective steps to build an effective system. Adhere to the following rules when building risk management:
- Diversification. Trade different assets; make an investment portfolio from different cryptocurrencies with similar dynamics.
- Limit losses. There are special software tools to limit losses on the exchanges that will save the deposit if you are distracted or could not close the deal on time.
- Be flexible. The crypto market forces traders to adapt to trends. Adapt your risk management system and trading strategy by observing the trends, monitor the changes carefully.
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