Learning how to manage your risks and capital is equally important in successful trading as learning trading techniques and the use of analytical tools. What are some of the components of a working risk management strategy? Let’s have a look at some of the most common ones.
Contents
1. Risk tolerance and money management
Money management techniques all aim at achieving the growth of your capital while controlling for risks. This is achieved by adjusting position sizes (how much of your capital is allocated to each trade) according to one’s risk tolerance. Some traders choose more aggressive and risky approaches by placing a large portion of their capital on a limited number of trades, while others choose a more conservative approach and place only a small percentage on each position (for example, no more than 3% of their funds). For novice traders, a more conservative approach may be considered to avoid major losses. Pocket Option allows you to choose the size of your trade position in dollar terms but also as a percentage of your total balance:
Another important tool in money management is the use of a stop-loss. In case the price moves in an unfavorable direction resulting in a loss, the trade will be automatically terminated. This also saves you some monitoring time as well as avoids losses.
2. Asset Diversification
It is quite a common practice amongst traders to focus on only a selection of assets and learn how to trade them well. However, this approach can be quite risky: placing all of your capital on a very limited number of positions may lead to great losses if markets move in an unpredicted direction. To avoid this type of situation, one can use asset diversification: mixing different types of investment instruments in their trading process. The idea is that in case one position leads to losses, they might be compensated by gains from a position on a different asset. This reduces exposure to risks that are associated with trading a single or very few assets. Diversification does not necessarily involve picking different asset types, like stocks and currencies, but can also be done within the same asset class, by for example investing in both domestic and foreign stocks or stocks of companies from different industries.
Thankfully, Pocket Option offers a great variety of assets of different categories for you to choose from:
Each asset has a % profitability next to them. A higher percentage indicates a higher potential profit in case of a successful trade. You can always set up quick access to your favorite instruments by clicking on the star sign next to them. They will appear in the quick access bar.
3. The right entry and exit points
Determining the right conditions for entry and exit points is an important part of risk management during the trading process. It is important to identify the direction of a trend but also determine the exact time of when a position that is based on this trend can be opened and closed. Tools of technical analysis are often used to identify trend directions and spot appropriate time points to buy (enter) or sell (exit) an asset.
Pocket Option offers a great selection of technical tools and different chart types to facilitate the process, such as the Fibonacci retracement levels, moving averages, oscillators, etc:
One might also consider using the basic support and resistance levels to spot entry and exit conditions and drawing tools on the platform. Do remember however that price patterns identified through technical analysis provide a potential indication of a trend and buy/sell signals but do not guarantee certainty. Trading always involves risks as asset prices are very volatile. It is therefore a common practice to use several indicators, as well as information from both technical and fundamental analysis, to confirm signals.
4. Analyzing the trading history
You might have chosen a specific trading strategy to pursue during the planning stage, but that should not mean that you cannot make alterations to it. Learning from mistakes is an important component of your trading process and yet the majority of traders do not spend the time to do so. It is quite difficult to fix trading mistakes before realizing them beforehand. To make this analysis as easy as possible, Pocket Option keeps the history of your transactions under the Profile section; you can always filter positions by times, types of trades (Express trades, social trading, MT5 Forex, or demo trades).
Furthermore, the platform provides several recommendations at the end of the page, based on your trading history, suggesting a list of profitable assets, top-performing traders, and the most accurate signals on the platform.
Keeping a trading journal may also be quite useful in your performance analysis. You can then easily outline patterns in your trading process that led to mistakes, identify which financial instruments, strategies, times, and frames led to the most profits or losses.
5. Market Analysis
Risks that an asset is exposed to are generally divided into two general categories: company-specific and market risks. A trading instrument is affected by a variety of external factors, economic changes like interest rate changes, sanctions, economic crises, political events like election results, global happenings like pandemics, or environmental disasters. It may be quite challenging to keep an eye on all of the market events, so one might choose several factors that affect the assets they trade the most. For example, while trading stocks one might monitor industry events, country, currency, liquidity risks, etc.
Pocket Option provides an economic calendar with relevant events and an analytics section. It also offers analytics tools that can be downloaded for your devices, as well as applications for trading signals and strategies:
Hopefully, now you have a better idea of various risks and money management techniques on Pocket Option. It is always possible to practice these strategies on a Demo account before risking real capital. Best of luck and enjoy Pocket Option!
Risk Warning: The trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. You should never trade money that you cannot afford to lose.