The discussion of numerous indicators, tools, and strategies in order to determine the optimal entry point for a particular trade consumes a significant amount of time and energy. Although they are all significant to your overall performance in the market, there is only one aspect that will determine whether you will be successful or unsuccessful in the market: your attitude toward risk. Effective risk management is one of the most critical things a trader may have at their disposal if they want to have a long and successful trading career.
Why risk management is the most important piece of the jigsaw?
By recognizing and controlling risks, risk management may aid in reducing financial losses. It may also aid traders in avoiding a complete loss of their funds. Losses incurred by traders constitute a threat to their trading capital. Investors that are capable of managing risk may be able to make money in the market for as long as possible.
It is a critical, yet often overlooked, requirement for successful active trading in the long run. To put it another way, even a seasoned trader who has earned substantial profits might find himself in the position of having lost everything with only one or two bad trades with an oversized position.
Why you need Risk Management trading with Prop Firms?
1) Consistency is required by Prop Firms
When trading with a prop firm, it is not the amount of money you earn that is most important. It all depends on how long you can maintain your current level of
performance. In order to ensure that your account remains active in the markets for as long as possible, you must be prepared to utilize risk management methods in order to avoid excessive losses.
2) Drawdown is more important than profit percentage.
If you manage to gain 20 percent every month while suffering a 25 percent drawdown, you’re really not doing a good job in the market. In fact, you’re putting yourself in more danger than you should be. However, a monthly profit of 10% with a drawdown of 5% implies that you know what you’re doing and that your trading account is safe, considering the little amount of drawdown you have. This can only be accomplished via risk management.
3) You are not trading your own money
Prop Firms use a set of risk management guidelines that serve as a guide for traders. These regulations are in place to protect the cash that the Firm will provide to you, not to make your life more difficult. Keep in mind that this is not your personal money you’re dealing with! You must handle it with respect and conform to the rules and regulations. If you follow these simple directions, it is almost impossible to reach risks of capital ruin.
To better understand the significance of risk management, let’s have a look at some straightforward tactics and what happens if you fail to use them.
Plan your trades, and trade your plans
Benjamin Franklin once said – ‘By failing to prepare, you are preparing to fail.’ This is also true in trading. Before market opening, take some time to do your homework. Regardless of the trading method and strategy you choose, be sure to
mark major and minor support and resistance levels on the charts, create alerts for entry and exit signals, and know when and how you will tackle the markets. If you don’t have a plan, you’ll find yourself stumbling around the charts, hoping to catch any unprepared trades.
Identifying your stop loss
What if your trade doesn’t go according to the plan? – And it often does – then you need a stop-loss. This is the price at which a trader would close out a position in order to avoid further losses. Those levels are meant to restrict losses before they become more serious. Not setting your stop-loss increases risks of higher losses and eventually adds danger to the whole trading account.
Control leverage and keep it to a minimum
Using a large amount of leverage entails a great deal of danger. Because it’s readily accessible and simple to get in the forex market, many traders choose to employ it, which leads to inescapable and uncontrollable losses. Most prop firms give you a limit to using leverage, to make sure you’re not risking too much with overleveraged positions.
Quantify your risk
For each trade, how much of your capital should be at risk. Answering this question is up to you as a trader if you’re using your own funds, and up to the prop firm if you’re trading their money. You can better regulate your position size if you can measure the risk you face in each trade.
As a result of following these regulations and standards, traders learn how to control their risk in a methodical and planned way. Your losses and exposure will always be restricted. At first, it may feel like a constraint, but learning to operate within these rules is essential for your long-term trading success with a prop firm.