Which is more important chart analysis or risk management?
Most forex traders start studying chart analysis, hoping to find an analysis tool to make easy profits. Consequently, teachers promote chart analysis as beginner traders are most interested in learning as many technical indicators as possible. Following losses, most traders will focus on finding a new chart analysis tool rather than looking for another reason behind their losses.
Even after learning many technical analysis tools, most traders are still making losses. Chart analysis focuses on entry points rather than exit points, and the reason for the losses is usually down to poor risk management. While chart analysis can help future price movements, achieving a high win-loss percentage does not guarantee long-term profits. Many losing traders have win-loss percentages over 50%, but poor risk management is the cause of losses.
Effective risk management helps traders minimize losses, protect capital, and preserve profits. In contrast, chart analysis is just one aspect of trading that provides insights into market trends and helps traders decide when to enter and exit trades. Without proper risk management, even the most skilled chart analyst can experience significant losses in forex trading. Traders who fail to manage their risk effectively may fall victim to emotional trading, over-leverage their accounts, or fail to use stop-loss orders. These mistakes can lead to large losses that can wipe out a trader's account, even if they have correctly analyzed the market trends.
In contrast, traders prioritizing risk management in their trading strategy can minimize their losses, maintain a stable trading account, and ultimately achieve long-term profitability. They can do this by setting realistic risk-reward ratios, implementing effective stop-loss and take-profit orders, and diversifying their portfolios to mitigate the impact of market volatility.
How to improve risk management
Plan your exit before entering the market
It can be difficult to make calm decisions when holding a position under the pressure of making and losing real money. Therefore, having an exit plan for all your trades before you enter a position is vital. Planning your stop loss and take profit levels while you plan your entry point will help you focus on high-risk reward (profit larger than loss) trades.
Avoid changing position size often
Many traders chase their losses by increasing the number of lots they trade after a loss. Avoid changing your position size during the trading day, and set your position size before you start trading.
Most traders try to avoid losses which can lead to failing to follow their stop loss. Before entering any trade, prepare yourself for a loss so you are not surprised when you make a loss and can remain calm.
Focus on risk reward
Looking for trades with a high potential to make large profits compared to losses is the most critical job of a trader. So instead of trying to achieve a high win rate, focus on attaining higher average profits than losses.
In summary, while chart analysis is essential for forex traders, effective risk management is critical to long-term success in the forex market.