Risk management in trading: a real path to profit

Many mistakenly believe that trading is the art of predicting market movements. However, this is far from the case.

Experienced traders do not rely on guesses. They operate on probabilities and manage risks wisely.

That's why even with 50-60% losing trades, they remain in profit. How do they manage this? Let's find out.

The essence of risk management in simple terms

Risk management is a set of measures that allows you to preserve capital in trading and ensure stable income, even if you often make mistakes.

This can be compared to a seatbelt in a car:

You don't plan to get into an accident, but if something goes wrong, it will save your life.

Key Principle: Limited Risk, Unlimited Profit

With each transaction, you determine in advance:

• maximum allowable loss
• potential profit

Optimal ratio:

Risk: 1 Profit: 2-3

That is, by risking $20, you aim to earn $40-60.

Why is this effective?

Let's say you made 10 trades:

• 6 of them turned out to be unprofitable
• 4 - profitable

Each losing trade: -$20 Each profitable trade: +$60

Let's do the calculation:

| Result | Calculation | Total | |-----------|--------|------| | Losses | 6 × (-$20) | -$120 | | Profit | 4 × (+$60) | +$240 |

Final result: +$120

Despite the fact that 60% of the trades were unsuccessful, you remain in significant profit. This is the strength of sound risk management.

Calculation of Transaction Volume

Main formula:

Trade volume = Risk in $ / Stop-loss in $

Example:

• Your deposit: $1000
• Risk per trade: 2% = $20
• Stop-loss: 80 points

Therefore:

Volume = 20 / 80 = 0.25 lots

You open a position of 0.25 lots. If the market moves against you by 80 points, you will lose exactly $20. No more than that.

5 rules of effective risk management:

1. Limit the risk to 1-2% of the deposit per trade
2. Always set a stop-loss - determine your exit point in advance
3. Calculate the transaction volume using the formula, not intuitively.
4. Evaluate the risk/reward ratio ( do not enter the market if there is no possibility to double the bet )
5. Keep a transaction journal - analyze your mistakes and successes

How does this contribute to earning?

Because:

• You do not risk losing your entire deposit in 1-2 trades.
• Your profit exceeds losses
• You can be wrong and still be in the black
• You trade calmly, without panic and emotional decisions.

Trading is a business, not a gamble.

In business, you always take into account:

• Investment amount
• Possible losses
• Expected profit in a favorable scenario

Trading is based on the same principles.

You shouldn't put everything on one deal.

One must think in terms of series of transactions, like a true professional.

Conclusion

Risk management is your system for survival and growth in the market.

Without it, you find yourself in the role of a gambler. With it, you have a strategy that works in the long term.

Even if 5 consecutive trades are losing, you will be confident:

"I am acting correctly. One successful deal can compensate for all losses and bring profit."