The main goal of any trader should be to stay in the game by implementing well-defined and clear risk management strategies. Without having the proper discipline to execute a trading strategy that includes risk management rules, and entry and exit rules it is impossible to make money as a trader. Let’s go into more detail about risk management and discipline and define steps to achieve both of them.
How do trade markets successfully?
The major tips for successful trading include strategies and the necessary environment required to implement these 1-minute strategies. It is critical to find brokers with the tightest spreads and low commissions when using lower timeframe strategies as spreads tend to eat most of the profits if they are more than 1 pip. Risk to reward ratio is another great tool to set proper risks when trading markets. Traders should try to target profits 2-3 times the risk, and not risk more than 1-2% of the trading account. If a trader has 10 000 trading accounts they should never risk more than 100-200 dollars (or whatever their account currency is), this rule is especially effective when trading with leverage. The main tools for proper risk management are risk-to-reward ratio, position sizing, and stop loss and take profit orders.
Risk-to-reward Ratio and win rate of the strategy
The risk-to-reward ratio is calculated by how much trader risks compared to profit targets. 1:1 risk-reward means traders risk 1 dollar to profit 1 dollar. The most popular risk-reward is 1:2. Depending on the win rate of the trading strategy the risk-to-reward ratio can define if a strategy wins or loses money. Win rate refers to the average percentage of winning trades from 100 trades. Depending on the strategy specifics it can vary from 33% to 66%. A lower than 33% will make it harder to hit targets at the end of the month. Trend-following strategies generally have a lower win rate and higher risk-reward ratios when compared to scalping strategies. Scalping is an approach when a trader tries to make many trades throughout the day for small profits and this is why tight spreads are the first consideration when deploying one of these strategies. Scalping strategies have a higher win rate of above 60% and a lower risk-to-reward ratio can be applied of 1:1.5 or even 1:1.
Proper position sizing to stay in the game of trading
Position sizing is another great strategy to limit losses and stay in the trading business as long as possible. It refers to the practice of opening positions with certain risk management in mind, for example, traders may open a position no more than 1-2 % of their trading capital to limit risks. This approach is very effective and can reduce risk exposure.
Stop loss and Take profit orders
The cornerstone of trading risk management is a stop-loss order that limits the maximum losses a trader is ready to accept. Stop loss is just like other market orders that close the position when the price hits a certain price point. Stop loss is a must no matter what the strategy is. Without stop loss failure is guaranteed. All trading platforms, the software which enables opening and closing of positions comes with inbuilt stop-loss features to control risks. Another side of this coin is a take profit that also closes a position at a certain price when the trade is in profit. With stop loss and take profit, we can determine the risk-reward ratio of each trade and see if it is acceptable with the trading strategy.
Discipline in trading
Discipline is another critical skill in trading. It helps traders to execute their trading strategies flawlessly and if the trader is not disciplined they can not succeed. The disciplined trader will have a well-defined risk management plan that includes appropriate position sizing, stop-loss orders, and risk-reward ratios. By sticking to their risk management plan traders can limit losses and protect their trading capital from drawdowns. Without discipline, traders are more susceptible to taking larger risks and losing a significant amount of their trading capital jeopardizing their trading career. Another aspect of trading where discipline comes in handy is patience. Traders need the patience to wait for the best trading opportunities and follow their strategy rules for entry terms. Without discipline and patience, traders will have a hard time maintaining steady profits and performance in long term. Only after meeting all these terms can traders become consistently profitable by following their strategy and improving it slowly without haste.
Conclusion
Successful trading requires discipline as well as proper risk management. Traders must have a well-defined plan that includes entry and exit rules, risk-to-reward ratio, position sizing, stop loss and take profit orders, and patience to wait for the best market conditions for their strategy. By implementing these strategies, traders can limit their losses, protect their trading capital, and increase their chances of success in the long term in the risky business of trading. Without discipline and risk management, traders are more susceptible to taking larger risks and losing significant amounts of their trading capital potentially jeopardizing their career as a trader. Prioritizing discipline, and risk management are key to staying in the game of trading and developing successful trading strategies.
