Do you know what causes many traders and investors to fail and lose money in the early stages of their financial journey?
Lack of risk management plan!
This is true for most financial assets, not just gold and foreign exchange.
What is the reason?
This is because a trader’s primary goal is to make a profit, not to preserve capital.
Yes, just to make money! Make a profit, that’s the main goal.
Unfortunately, risk is as much a part of trading and investing as profit is, and you actually have to trade a certain percentage of your capital for returns.
Therefore, it is very important for you to know how to manage it. This allows you to avoid risk while safeguarding your capital.
Understand the various factors that affect the price of gold
We said it before:
- Gold prices are inversely related to economic downturns, recessions, inflation and the dollar.
- It is affected by supply and demand trends, and central bank monetary policy.
- Gold is directly proportional to the yen.
- Metal currency pair XAUUSD tends to move in a trend.
- During certain months of the year, the price of gold is high.
Armed with this knowledge, you will know how to ride the ups and downs of gold. You can invest when prices are high and play it safe when prices are low.
Maintain a correct investment attitude and self-discipline
In many cases, a person’s worst enemy is himself. Your inability to manage your emotions and reactions to the gold market or trading results can be your element of failure.
When was the last time you failed? What is your first thought?
- You want to take a bigger risk on your next trade to cover your losses.
- You want to open more positions, and hope that all positions will bring profits, which will make up for your losses.
- You take a break and regain your composure before resuming the trade.
- You scrutinize what happened and develop a better strategy.
If you are prone to the first and second situations, then the risk you have to bear is not only your capital, but also the risk of losing your confidence.
If you choose the third and fourth, then you can better control your emotions and mentality.
Negative emotions are not only caused by losing trades, winning can also lead to self-centeredness, which can have the negative consequences of losing money.
Therefore, our goal is to master the correct trading mentality and strictly abide by the trading plan and money management.
Always set a stop loss
You should place a stop loss immediately after placing an order. This will protect your capital and minimize your losses should the market move against you. Basically, it protects you from unknown risks.
Unfortunately, your stop loss may be affected by short-term price fluctuations, resulting in unnecessary selling; if you do not set a stop loss, it may cause even greater losses.
Consider your risk reward ratio when determining the right stop loss. For example: If you choose 1:3, your stop loss will be set at the position where you may get 3 times the transaction amount.
If you can trail the stop loss, it gives a certain percentage below the market price.
Control the positions you open
Ideally, you should open trades within the recommended amount range based on available funds. If the trend reverses, your entire capital won’t take a huge cut.
Remember, there is no way to predict the market 100% of the time, and there is still a risk of analysis errors or trend reversals.
What if you want to open multiple positions?
Consider your risk on each trade and the impact on your account of closing all positions at a loss. Assuming you risk 2% per trade, if you open 4 positions and lose all of them, your account will be down 8% at the end of the day.
Use a high risk reward ratio
When you trade gold with a higher win rate, you have a greater chance of profiting.
A good strategy to use when trading XAUUSD is to trade at a ratio of 1:3. This also means that you should only take a trade if the setup is likely to be such that you risk more than 3x what you are taking. The profit you earn depends on the number of trades you win.
For the sake of illustration, here is a simple example. Let’s say you have a total of 10 transactions of $1,000 each. With a risk reward ratio of 1:3, you should get a return of $3,000 per trade.
- If you win 30% of the trades, you make a total of $9,000 (3X$3,000) and lose $7,000 (7X$1,000), for a total profit of $2,000.
- If you win 50% of the trades, you make a total of $15,000 (5X$3,000) and lose $5,000 (5X$1,000), for a total profit of $10,000.
This is a strategy where your risk is the same in every transaction of XAUUSD and it is recommended that you risk no more than 2% per transaction. If you have $50,000 in capital, that’s $1,000.
Learn basic money management
Whether you are trading gold, foreign exchange or other financial instruments, learn about the advantages that basic account management brings. This is especially important for leveraged trading.
The rule is simple, your average profit must be higher than your average loss. It is crucial that you rigorously calculate the difference between the two to determine whether you will get a positive or negative result.
When you win, you make a profit. If you are greedy and wait to earn more, you may end up losing money.
When you combine money management rules with the risk management strategies listed above, you will be able to safeguard your capital when trading gold and other financial instruments.
