Introduction
Risk management is vitally important to traders. Without a risk management plan, a trader is doomed to fail, regardless of how good their strategy might be. This article will delve into the importance of risk management, especially for traders using online prop firms, and provide actionable advice to help traders develop a sustainable risk management approach.
Understanding Risk Parameters
There is a general consensus among traders that they should risk 1-2% of their account balance per trade. On a personal account, where the trader has the entire account balance to fall back on, this might not be a bad rule. However, for online prop firm trading, 1-2% risk is most likely far too high.
With an online prop firm, traders generally have a maximum loss limit of 10%, which can be considerably less on certain account types. This necessitates a more conservative approach to risk.
Knowing Your Strategy’s Tendencies
Before attempting to trade with an online prop firm, it is essential for traders to understand the tendencies of their strategy. If your strategy can have a 10R drawdown a few times each year, then risking 1% per trade on a prop account guarantees that you will lose your account(s) a few times each year. Some traders regularly risk 1.5% or 2% per trade on prop accounts, giving them a 5-7R loss before the account is done. While some may be successful with this approach, for the vast majority of traders, this amount of risk is unsustainable.
Tailoring Your Risk Management Approach
Knowing your edge and choosing your risk parameters based on how your strategy performs over time is crucial. Don’t look to influencers and content creators and attempt to model your risk management approach on what you see them doing. You have to do the work to determine what risk management approach is right for you and your strategy.
Practical Risk Management Advice
One of the best pieces of risk management advice for prop firm traders is to start trading with very small risk (0.1 – 0.25%) whenever the account balance is at break-even or below. Only increase size once there is a profit buffer in the account. This approach helps maintain a stable mindset and ensures that if the trader encounters a losing streak, they don’t inflict damage on the account that is difficult to recover from. The primary obstacle to this approach is greed.
Conclusion
Risk management is a critical component of successful trading. By understanding your strategy’s tendencies and tailoring your risk management approach to fit those tendencies, you can avoid the pitfalls that lead many traders to failure. Start small, increase risk cautiously, and always align your risk management approach with your long-term trading goals. By doing so, you’ll improve your chances of maintaining a profitable trading account, especially when working with online prop firms.
