The Rules for Effective Risk Management
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The best way to avoid the risk of ruin when trading options is to never put on a position size greater than 1% to 2% of your total trading capital. Using fix loss option plays is important so you cap the amount of your losses if a strong trend moves against your short option. You should buy your hedge at the location of price you want to cap losses at.
Risk/Reward ratio
Way to increase risk/reward ratio. With risk/reward ratio I will take into account average losing$ vs average winning$ not profit/loss on a single trade basis.
Stop losses, position sizing, and trailing stops are all ways to manage risk in trades.
exactly what it says, stop your loss. A stop loss sets the predetermined risk for your trade in monetary terms at a specific price level.
Understanding Leverage
is a double-edged sword. It increases profit potential but also loss potential. The thing that lures people into high-leverage brokers is the wrong mindset about risk. This mindset forgets, that with more reward comes more risk. Often people don’t understand this simple fact.
Avoid Overtrading
Overtrading is a big risk as a discretionary trader.
Never recover losses.
many traders overdo it because they want to recover previous losses and find themselves in an endless spiral of another trade, and another trade