I split risk management into two parts the first part is financial so for example you don’t want to risk losing too much, you don’t want to risk losing your entire account don’t risk too much per trade because it can have an adverse financial impact, this is the obvious aspect of risk management that everyone is aware of.
However the second the aspect which is what no-one really talks about and what I feel is the most important aspect of risk management is revolving around knowledge, you may be thinking how does knowledge relate to risk management? Basically knowledge will take the risk out of an activity, the more knowledge you have, the more skill you have and the more practice you have will reduce the risk of any activity.
Let’s take for example rock climbing if you have never done rock climbing before and you venture out to mount a cliff face it’s pretty risky, if however you’ve been climbing for thirty years you have all the correct equipment and you know exactly what you are doing the risk is greatly reduced in that scenario, it is still risky but the risk is far less.
The same applies to trading part of your risk management should be the increase in your skill and the development of your knowledge, so that the more you know the more practice you have in the markets and the more skill you develop the less risky trading becomes.
So it’s not just about financial risk but its about how well you understand the markets and that’s where fundamentals coming so that understanding the reasons why the markets moves is key to drastically reducing the risk as it gives you confidence and it gives you skill rather than staring blankly at a chart waiting for an indicator to turn blue or red and then hoping the price goes in your direction.
That is why technical trading on its own is a far more random way of trading and you’re going to struggle to succeed doing that as you are not building up any knowledge or you’re not building up any skill you’re just looking for somebody else to do the work for you and hope it works.
With fundamental trading and that thinking like a professional trader you are developing the knowledge and skill set of your own just like you would in any other career, over the years the more you practice that skill the better you will become and the less risky your trading will become.