Understanding the key concepts of risk management

One good thing that you should know as a trader is the concept of risk management as it is the only way you can secure your stay in the market. As a trader, you can't just wake up and open a trade when you have to plan to manage your risk or understand the three concepts of risk management.

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Here, we will be learning about the three key concepts of risk management in trading the financial markets.

Safeguarding your capital should be your priority as a trader which can become possible through the way you manage your risk. "Risk management" is very important in the financial markets to understand, as understanding the concept of risk management will help you not only to set your stop loss but will help you position yourself better.

An expert trader who understands the importance of risk management will always cut his or her losses on time, and let the winning side of his or her trade ride. Well, it is not easily done as said, because of greed, and the desire to make more, which most traders have ended up liquidating their accounts.

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The 3 concepts of risk management you should keep in mind

These three concepts of risk management and trading strategy are very important and failure to know and apply them might liquidate your capital. These three concepts are;

• Stop losses.

• Position Sizing.

• Scaling.

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Stop loss

Stop loss is very important to set when trading financial markets like very volatile cryptocurrencies. Stop loss is included in the trade and risk management plan even before opening an order. Now simply put, stop loss is where or the point at which you have decided to exit the market completely.

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For example, you open a BTC/USDT Long position at $69565 but don't want to lose more than 5% of your capital and you set a stop loss at $69000 is what stop loss means. Stop loss is a risk management strategy that helps you to completely close your position even in your absence.

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Position sizing

Simply put, position Sizing means the amount of capital that want to go long or short which is determined by the amount you have agreed (willing) to lose should the trade go against how you want it to go.

As a trader who is still learning how to trade the financial markets, it is advisable your risk should not be more than 2% of your capital, using 5% risk and above can easily liquidate your position size. For instance, your position size is $1,000 and you want to go long on a coin whose price is $10 and wish to use 2% as your maximum risk.

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Risking 2% means risking ($20) which by doing means means you should set your stop loss if the price of the asset falls to $5. Based on your setup, if the price of the asset falls to the level at which your stop loss is set, your position will be closed completely.

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Scaling

In a nutshell, scaling means adding or removing to avoid losses. It is a method of opening positions (trades) that involves beginning with a small amount and adding to the amount gradually. Most traders use this risk management strategy to get exposure to the market gradually till when they become masters.

Scaling helps you to reduce the risk of losing your capital, which in a situation where your position goes wrong you will not lose much in the market, compared to when you don't apply scaling in your trading.

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Conclusion

_{In our today post, we have discussed the key concepts of risk management in trading the financial markets which are the best way of securing your capital and becoming a successful trader. Note that this post is not investment advice, but serves as educational content.}