Human desire and greed drive one to enter the markets and take risks, which is reflected in the failure of 95% of traders. The mistakes are easy to identify but hard to apply. What distinguishes the 5% of traders from the rest?
✅First: Do they have a different analysis style? But in reality, most successful traders have easy and simple strategies. Simple strategies have proven their effectiveness; the trend line strategy is one of the most important and simplest strategies, and the oldest for those who wish to learn about it is the Dow Theory. There are traders who rely solely on it without indicators, describing that indicators reflect the past, not the present.
The simpler the strategy, the easier it is to continue with it and meet its conditions. So it's not analysis that distinguishes them.
✅Second: When asking the most successful traders, they all have one answer: risk management. To explain the concept of risk management simply, it will be the opposite of human desire, which makes applying risk management the part that causes 95% of traders to fail and lose their money. Let's explain risk management from a theoretical perspective, away from technical analysis.
Example:
Without technical analysis, the success rate will be 50% and failure 50%.
To build a trading strategy based on risk management, it will be as follows.
1/ Divide your capital with 20% for each part, making your capital divided into 5, allowing you to enter one position for each part, provided that each part is divided into 4, giving you 4 opportunities to enter the same trade.
2/ You will be allowed a daily, weekly, and monthly loss limit, divided as follows: 3% daily, a total of 5% weekly, and a total of 10% monthly.
If you lose 3% today, stop trading and come back tomorrow. But tomorrow you will only have 2%, and if you lose tomorrow, you will come back next week under the same conditions, and if you lose, you will come back next month.
To understand the meaning, risk management is set to keep and preserve your capital from loss, not to maximize your profits.
3/ Determine the profit-to-loss ratio with a minimum of 2 profits to 1 loss.
4/ Never be patient with losses; after the fourth entry into the trade and a total loss of 1%, close the trade regardless of the result. Do not let a bad trade be your end in the market; you must continue and preserve your capital, and to do this, you must eliminate the loss.
5/ Do not use leverage for beginners and professionals; the maximum leverage limit should be 5 times.
Now, assuming you entered 100 trades during your first year of trading and applied the risk management conditions precisely.
1/ You will have losing trades totaling 50 trades with a risk rate of 1%.
2/ You will have successful trades totaling 50 trades with a profit rate of 2%.
Total loss is 50%, total profit is 100%, and deducting the total loss gives a total profit of 50%. This rate will not achieve quick wealth, but you managed to endure in your first year of trading, which is considered the hardest and most losing and frustrating year. This is risk management.
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