Top 5 Risk Management Rules Every Trader Must Follow
Risk management is the foundation of successful trading. These five rules keep you in the game.
Risk management
The percentage of your trades that end in profit; important only when combined with the size of average wins and losses.
Win rate is the share of trades that close in profit. If 45 of your last 100 trades made money, your win rate is 45%. Beginners chase high win rates and are drawn to sellers who claim 90% accuracy, but win rate alone says nothing about profitability. A strategy that wins 80% of the time with ₹500 average gains and 20% of the time with ₹4,000 losses loses money: 80 × 500 minus 20 × 4,000 is negative. A trend-following strategy that wins 35% of the time with wins three times the size of losses makes money. What matters is expectancy, which combines win rate with the risk-reward ratio. Track your win rate honestly in your journal over at least a hundred trades, and read it together with average win, average loss and maximum drawdown before judging whether a method works.
Risk management is the foundation of successful trading. These five rules keep you in the game.
VideoMargin is the money your broker blocks before it lets you trade. How much depends on whether you buy for delivery, trade intraday or take a futures or options position.
VideoLeverage makes a position bigger than your cash. The spread is the gap between the buy and sell price. One multiplies your results, the other quietly charges you on every trade.