Risk Management

"Risk management is the most important thing to be well understood"


Amateur Traders don't give much importance to risk management. Many of amateur traders are under capitalized, as such they use excessive leverage to achieve their goals resulting in taking higher risk than normal. Majority of them don't place their stop loss beyond a technical price barrier, but use some arbitrary stop-loss, which market doesn't get respect very often. They give too much emphasis to an individual trade rather than a series of trades. In doing so they use poor risk to reward ratio giving losses too much room and taking profits prematurely, which make current positions more likely to succeed, but deteriorate their risk to reward ratio on long-term performance. They don't strive for consistent profitability by balancing risk relative to the accumulated profits or losses. When they are on a losing streak they tend to tremendously increase their bet size to cover earlier losses and they keep on repeating same risk management mistakes until their account is wiped out.

Professional Traders know that risk control is essential part of trading and can make the difference between success and failure. They are fully aware that to be profitable they don't have to win each and every trade. They know that if they are selective enough and use proper risk management they would come out winner in the long run. When they place an order they don't think how much profit they can realize on a particular trade, rather their emphasis is how much potential loss they could suffer on a given trade. Majority of professional traders place their stop-loss beyond some technical barrier and at a point that, if reached would indicate that the trade is wrong and it's time to take a loss and wait for the next edge. They think rationally and just don't keep moving their stop-loss away hoping that a losing trade
would turn out as winner. Instead if the market is not reacting as expected they are not afraid to cut their losses much earlier before their stop-loss is hit. When they are on a losing streak they decrease their bet size until they are back in the winning zone. They know that consistency is far more important than making lots of money. When they are on a winning streak they increase bet size after, and only
after, periods of high profitability. In other words, if they have a particularly profitable recent period, they may try to pyramid gains by
placing a larger bet size assuming, of course, the right situation presents itself. The know that key to building wealth is to preserve capital and wait patiently for the right opportunity to make the extraordinary gains.

You could read my full article here http://www.dukascopy.com/fxcomm/fx-article-contest/?Trading-Comparison-Amateur-Traders-Vs&action=read&id=813
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