The global financial markets are becoming riskier by the day, as traders analyze an endless stream of conflicting signals. The widespread adoption of computer-based trading algorithms has also introduced unprecedented volatility in today’s markets, making it difficult for participants to effectively manage systemic risks. To top it all off, we are currently trading in one of the most uncertain climates in recent history, with governments and central banks desperate to encourage growth.
In this environment, risk management is more important than ever. In what follows, we look at five risk management strategies from professional traders themselves.
- Plan Your Trades
Unlike what you see in movies or on television, trading the markets isn’t done on whim. You don’t just “feel like” shorting a stock index or buying a major currency pair. Your decision to execute a trade must be carefully planned ahead of time.
Warren Buffett is the most successful value investor of all time. He is also the most well read. The Oracle of Omaha spends most of his day reading and thinking, not buying and selling stocks. In Buffett’s view, you need to get smarter before you can trade more effectively. Smarter traders are also less prone to making big mistakes or letting their emotions control them.
- Let the Technicals Confirm Your Deals
Technical analysis is a critical part of trading successfully. And while being a strong technician doesn’t preclude the need to learn and apply fundamental analysis, confirming with the technicals should become a habit. If you feel that the market is giving you a signal to enter into a position, be sure to confirm your position with a short-term oscillator or momentum indicator. These simple tools can help you determine whether there’s actually a basis for trend reversal or continuation.
Marty Schwartz is widely regarded as one of the best technical traders of all time. He keeps his technical analysis remarkably simple, focusing on moving averages and positive divergences. Remember, technical analysis doesn’t have to be complicated.
- Diversify (But You Already Know This)
Diversification is one of the most critical strategies for long-term success in the markets. And everybody knows this. Diversification reduces risk by allocating investments across various instruments and asset classes, ensuring the trader isn’t overly exposed to one segment of the market. This might also be a great way to maximize returns in different areas of the market.
Jack Bogle, the visionary investor who put together the first index fund, also emphasized diversification. Along with low expense ratios, it is one of the most important rules for successful investing.
- Use Leverage Responsibly
Leverage can be a great tool because it allows traders to maximize their reward. However, when they’re wrong, leverage can be a double-edged sword. In fact, leverage may at times be downright catastrophic if you don’t do your research. Wealthy investors know the power of leverage. As Robert Kiyosak in his book Rich Dad says, “The most important word in the world of money is cash flow. The second most important word is leverage.”
To use leverage responsibly, traders must follow the principles of money management. This often includes deciding on what you can afford to lose and using smaller amounts of leverage on each trade. Remember: just because you have access to extremely high leverage doesn’t mean you should use it.
- Manage Your Emotions
The forces of fear and greed often dictate the financial markets, pulling traders in the wrong direction. A trader’s ability to rise above these emotional responses is often what determines their stamina in the volatile world of finance. Luckily, overcoming fear and greed doesn’t have to be as difficult as it sounds.
When it comes to the markets, mastering your trading can be as simple as focusing on a particular trading method, following your trading plan and building a positive psychology. Make use of proven trading methods and only take positions that are rooted in sound fundamental and technical analysis. Most of all, don’t feel compelled to take any position unless it contributes to your goal. This may ensure that you don’t succumb to herd mentality, an unfortunate feature of the financial markets.
 ETF HQ. “Top 7 Technical Analysts of All Time Share Their Secrets.”
 Investopedia Staff (July 1, 2016). “The Importance of Diversification.” Investopedia.
 Folio Investing. “3 Famous Investors Who Followed Simple Rules – and Got Rich.”
 Roberty Kiyosaki Blog.
 Asia Forex Mentor. Forex Trading Psychology – Mastering your emotions for efficient Forex Trading.