Controlling risk while trading takes many forms. It starts with properly selecting which markets to trade, then moves on to decisions about allocating capital and taking appropriate-sized positions. But managing risk and limiting losses also is accomplished through understanding risk itself as well as human nature. Any trader’s chance for success improves with a disciplined use and understanding of money management techniques.
What you need to know about risk management
- The key to trading success is in managing risks and avoiding overtrading. In order to control your risk, you must first identify your risks.
- Risk management begins with each new trade. Futures traders that fail to use the risk-management techniques at their disposal will struggle to be profitable.
- Prior to taking any new trade, you must know where you will exit (i.e., where to put your stop) and how much equity is in your account. The difference between your entry price and stop-loss point (converted into dollars) tells you how much capital to risk per trade.