Prepare, Protect, Gain
As you will see, or as you may already know, the best trading practices often intertwine. They play off each other to create better strategies, with some more important than others.
But no matter where it is, it is imperative to remember that a couple bad trades can severely affect any gains you have garnered so far. There is an ever-present risk when you put money into something that is not completely in your control. The good thing is that you can control how much risk you will put yourself at.
Risk management is important to control the losses in the event of market reversals, high volatility, any exchange outages, server maintenance, etc. Properly managing risk helps protect the capital and gives a trader the confidence to trade even after a few losses. If no risk management is applied to a strategy, a possible loss of capital might occur.
Risk comes from not knowing what you're doing.
Warren Buffet
Berkshire Hathaway
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Plan once, then plan again, and then plan a third time.
Automated trading allows you to reduce risk with precise entry-exit, auto-rebalancing, monitoring, and immediacy for trading. This ability allows you the opportunity to plan your trades extensively and set up rules like a Stop-Loss and Take-Profit or some Set Stop-Loss Points. It is also important to look at what you hope to achieve from a trade and balance it against the risk. This extensive planning session will help stop a bad trade before it happens or keep a good trade from going bad.
Eggs in a basket.
Everyone has heard the saying, and it doesn’t bear repeating, but it is the essence of an important concept in risk management. Diversification allows for safety in the market, so that volatility in one asset doesn't completely knock you out of the game. A good rule of thumb from traditional finance is the one-percent rule.
This is the process of only putting one percent of your money, whether measured by your total or the trading account, into a single trade. In this case, a portfolio's performance graph will appear smooth and is often easier to handle in the case of loss. We know this behaviour isn't typical of young investors today, but we hope you'll understand the benefits.