All traders and investors want to trade profitably but most do not realise that they need a solid risk management strategy to make profits.
Most loose money, take a look at this:
IG – 76% of retail investor accounts lose money when trading spread bets and CFDs with this provider
CMC – 79% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider.
Plus500 – 76.4% of retail investor accounts lose money when trading CFDs with this provider.
Etoro – 75% of retail investor accounts lose money when trading CFDs with this provider.
Infact, if you are reading this article you are likely to be losing money and probably have an ineffective or non-existent risk management strategy.
All traders will have losing trades – fact. Infact the best traders may have more losing trades than a trader with with a high win rate but make much more money simply by having an effective risk management strategy.
Take this example:
- Wins 75% of his trades/ loses 25%.
- Makes $250 profit per winning trade.
- Makes $750 loss per losing trade.
- Makes 20 trades per month
- Losses $1,250 per month
- Wins 50%/ loses 50% of his trades.
- Makes $375 profit per winning trade.
- Makes $125 loss per losing trade.
- Makes 20 trades per month.
- Profits $2,500 per month.
What is Ted doing differently? He has a solid risk management strategy.
A solid risk management strategy ensures that:
- A strong method for identifying “Set ups” is adopted.
- Winning trades – “stay the course”.
- Losing trades are stopped out at the right time.
A solid risk management strategy is based around defined “risks and rewards”. In Ted’s case his risk/ reward ration is 3:1 so for every $100 he risks he could either lose that $100 or make $300.
Bill is in a “different place”. He has no risk mangement strategy and is likely adding to losing trades and exiting from winning trades early. For every trade he makes, he risks losing $300 to make $100. IT makes no sense but this is what most traders end up doing.
So thats why you need a risk management strategy.