Developing a risk management plan – How to Trade With Minimum Risk

Do you want to know more about developing a risk management plan and how to trade with minimum risk? Watch our latest video and get profitable trading results.

Developing a risk management plan – An easy but effective guide

In this video, I discussed designing a risk management system. While there are literally hundreds of articles and books written on this very topic, the one thing the most traders don’t understand is that it is the most important aspect of trading and the main reason why traders are either successful or not.

Most traders can come across systems on the Internet that says risk a certain percentage, and then the following “hard numbers” a peer in the statistics. The biggest problem with that is that you don’t know how many wins or losses you will have in a row. Because of this, I am going to address something that’s much more important than the hard numbers: a risk management system that you can actually use.

What I am saying is that if you have a risk management system that makes you nervous, you will go into the marketplace and mess up the trade anyway. After all, you have a 50% chance of being right or wrong at one point or another during each trade, so you need to decide when the trade has gone against you. Quite frankly, the smartest thing I ever did was to risk 0.5% on a trade, and noticed that it didn’t bother me. In fact, I managed to walk away from the computer and felt completely comfortable with whatever happens. After that, I went up to 1% risk, and found that I was still okay. I did eventually find a percentage that made me nervous and as a result I knew to cut back on the risk a bit.

Once I found my comfort level, it was easy to place trades and walk away. There are other ways to do this, some people will use a certain amount of pips to decide whether they are right or wrong in a trade. However, if you are risking say 100 pips, the market won’t care about that level like you do. What the market cares about is supporting resistance, so it’s easier to simply risk a certain percentage and place that below support or resistance, adjusting the trade size so that you fall within the parameter of risk that you are comfortable with. After all, if you find yourself very comfortable with the rescue can place a trade and simply walk away.

Like most things trading related, psychology is a huge part of the equation. You need to find your level of comfort, and start from there. Some people are comfortable trading as high as 10% risk on a trade, but they typically blow up rather quickly. Mathematically speaking, most large firms only risk miniscule amounts, such as 0.2% on a trade. I do realize that you are a retail trader, and you are trying to make more money than that. However, you have to be very aware and attuned to what your risk profile is, and work within that.