How can risk be minimised in trading?

How can risk be minimised in trading?

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Once you have identified the risks, you need to minimise them. There are various approaches that can be used for this. The most commonly used variants for minimising risk are the following:

  •     Setting stops or limits
  •     Hedging
  •     Selecting trades with low risk
  •     Diversification
  •     Limiting the size of positions

Setting stops or limits

Stop-loss limits are used to close positions automatically when a certain price is reached. This means that the trader does not have to watch the trades all the time, but can set up a trading setup beforehand. This has the positive side effect that no hectic decisions have to be made during the trade and thus fewer mistakes occur. 

In addition, the trader can calmly analyse the possible price targets beforehand using technical analysis. Based on this, the stops and limits can then be comfortably set in order to contain the risks. In this way, the risk-reward ratio is analysed again before the trade. A stop minimises losses to a previously defined amount, while a limit automatically takes profits.

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Hedging

Hedging minimises the risk by opening a position in the opposite direction to the first position. Hedging thus represents a protection of an open security or trading position against price losses. By opening a second position, price losses of the first position can be minimised.

Select trades with low risk

Risk can also be minimised through low-risk trades. These include, for example, securities without leverage, as the loss is then only limited to the capital invested. In principle, however, investments in less risky securities such as stable shares (blue chips) or bonds can also reduce the risk. However, understandably, as the risk decreases, so do the chances of profit.

Diversification

Diversification, i.e. the distribution of trades across different asset classes and sectors, can also minimise risk while you trade with Exness Indonesia. The risk is thus divided among different trades. Individual losses can thus be better absorbed, as these are in turn offset by other positive positions. It is important to ensure that the various positions correlate as little as possible with each other.

Limiting the size of positions

The risk can also be minimised enormously by limiting the size of the position. Professional traders only use a small part of their total trading capital per position. There is a so-called 1% rule in trading. This rule means that the trader should risk a maximum of 1% of his trading capital per position. Taking this rule into account, a trader could theoretically afford 100 losing trades in a row until the account is empty. However, so many losing trades are very unlikely, especially if the trader thinks about what he is doing beforehand.

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