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When you think of successful trading, what comes to mind? Most traders would say that it is about finding a perfect trading opportunity and capitalizing on it. When instead the correct answer is: consistency. In order to operate successfully on a daily basis, the trader must comply with certain rules. Risk management is clearly one of these, probably the most important, because those who want to make profits should first consider potential losses.
Risk management is a key concept that all novice traders should seriously consider. Unfortunately, this topic is often overlooked, sometimes even ignored as unimportant. More than one trader has failed due to lack of discipline and insufficient risk management.
When you are hoping for a single operation that could change your life for the better, you are demonstrating the behavioral pattern of a gambler (which is obviously counterproductive). In reality, trading has nothing to do with gambling. The sooner you understand it, the better it is. If you find yourself thinking about trading in terms of blind luck, you're definitely doing something wrong. Risk management rules are here to save you and make your entire journey in the trading world more productive.
The 2% rule
Again, not being able to calculate the right amount of money to invest in every operation you perform is very close to gambling. The allocation of a carefully calculated sum of money, on the other hand, can pay off over the long term. It is widely accepted that the optimal amount of money to invest in a single transaction should not exceed 2% of the entire capital.
Do not be afraid to calculate the exact amount of funds to be allocated to a single transaction
Knowing how to control losses is just as important for a successful trader as it is to identify a trend reversal, open the transaction in the right direction, etc.
Whatever the trading strategy you use, you will occasionally come across a series of defeats. This is the case where the rules for risk management are particularly important. When you win one transaction after another, it does not matter if you have 1% or 50% of the capital invested. In reality, you'd be better investing as much as possible when success is guaranteed. However, in reality, there is always a possibility of failure (which is actually quite high).
Therefore, you need to find the balance between the potential profit and the loss you may have to face. 2% is a sum large enough to guarantee consistent results over the long term and at the same time can give you enough flexibility to survive a series of defeats that will occur sooner or later. Let's take a look at a series of losses of only 5 transactions and compare what happens when we allocate 2% and 10% of the trading capital to a single transaction.
|# of the operation||2%||10%|
As you can see, there is a huge difference between 2% and 10%. When you allocate 2% of your capital to a single operation, you will lose only 10% of your initial capital. With a 10% share, you will lose more than 40% after a series of only 5 failed operations. A nice difference! No matter how good you are, in the worst case you want to remain as humble and disciplined as possible.
Remember that as a trader you are not looking for a jackpot. Instead, you should be interested in a series of small victories, each of which will make you a little richer.
The allocation of funds is not the only risk management rule to be followed. Still, it's something you need to get to know and, above all, to use in your daily trading routine. Only by following this simple rule can you greatly increase your chances of success.
This article does not represent an investment advice. Any reference to past movements or price levels is informative and based on external analyzes, we do not provide any guarantee that such movements or levels may reoccur in the future. In accordance with the requirements set by the European Securities and Markets Authority (ESMA), trading with binary and digital options is only available to customers categorized as professional clients.
GENERAL INFORMATION ON RISKS:
CFDs are complex instruments and carry the high risk of losing money quickly due to the leverage effect. 76% of retail investor accounts lose money when trading with CFD through this provider. You should make sure you understand how CFDs work and if you can afford to take the high risk of losing your money.
Source: IQOption blog 2018-11-02 11:38:43