The retail trader has it tough when it comes to managing risk. With little support and products with high leverage, the incentive for retail trader to lose all their money is high. Not only the incentive but also the potential. So, if you are new to trading here is a simple tip to help you manage risk.
Often when people start to get into the financial markets they do so because they have been sold a dream. A dream that says they can make double-digit returns each week, quit their job, and help all their friends and family with nearly limitless cash. The reality is very different. Most major firms are happy if they can return somewhere over 10% each year. Yes, that’s right, 10%. 10% is roughly what the average return of the stock market is, as measured by the S&P500, over the past decade. So, if you can return over 10% Wall Street says you are doing well.
So, lower your expectations. Double-digit returns are not possible each week unless you are taking large risks. Now with a small account care less if you have large equity swings. However, once the account increases in size guarding that capital is a key consideration.
The use of cash positions
Retail trader does not have a risk desk that will be on its back if it takes too much risk. The retail trader is alone and can easily get into trouble taking too many positions, too large positions, and too highly correlated positions, and entering illiquid markets. There are too many hazards to mention here, but there is one solution that can help. When you trade a position you can try using a cash position so your trade size will match your account size. What does that mean? It means the following:
- If you have a 10,000 USD account then trade a 10,000 position. In FX that would be a mini lot of 0.10.
- If you have a 100,000 account then trade one standard lot which would be 1.00.
So, in this way your account and trade size match. This will also mean that your equity swings will be well reduced than if you use highly leveraged trades. This is often the first step that beginner traders have to take in order to set the right conditions to develop a good trading mindset.