You can never eliminate risk completely when trading indices, however, you can reduce it by focusing on risk management.
Four strategies that can help reduce risk include:
- Determining your optimal position size
Before you start trading indices, you should determine your optimal position size for each trade.
A good rule of thumb is to avoid risking more than 2% of your capital on any single trade. Trading more than 2% per trade could expose you to losses that are hard to recover from.
- Putting stop losses in place
Stop losses are a fundamental component of a robust risk management strategy.
Stop losses help minimise trading losses by closing out losing positions before large losses build up.
- Using leverage sensibly
Leverage can magnify your trading losses so it should always be used sensibly.
- Keeping an eye on the economic calendar
An economic calendar can be an invaluable risk management tool as it will list events that could potentially impact stock indices.
By keeping a close eye on economic releases related to the index you are trading, you can anticipate price moves in advance.
Reprinted from eToro, the copyright all reserved by the original author.
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