Risks

DEFINITION of Risks

Risks are the ways in which an investment can end up losing your money.

WHAT IT IS IN ESSENCE

Trading strategies put focuses on weighing up the potential risk of a trade against its potential return. If a trade has greater risk, it should carry the chance of a greater return in order to make that risk worthwhile.  

There are two main kinds of risks in connection with trading: market and liquidity:

The Market, also known as ‘systematic’, is kind of risk that can result in losses due to adverse price movements. Market risk affects the entire market and so cannot be avoided through portfolio diversification.

Liquidity is the risk that trading an asset may affect its price. This may arise because the asset is illiquid, meaning there are not enough people in the market to trade with. It can also be caused by one of the participants in trade failing to meet financial obligations.

HOW TO USE

Following the 1% risk rule makes sense for many reasons, and you can benefit from understanding and using it as part of your trading strategy.

No one wins every trade, and the 1% risk rule helps protect a trader’s capital from declining significantly in unfavorable situations.

If you risk 1% of your current account balance on each trade, you would need to lose 100 trades in a row to wipe out your account.

If novice traders followed the 1% rule, many more of them would make it successfully through their first trading year.

Risking 1%or less per trade may seem like a small amount to some people, yet it can still provide great returns. If you risk 1%, you should also set your profit goal or expectation on each successful trade to 1,5% to 2% or more. When making several trades a day, gaining a few percentage points on your account each day is quite possible.

Even if you only win half of your trades