Risk management is the most important skill for successful traders. In essence, if you trade like a gambler, you won’t be around for long.
Risk management is the specific actions you take to protect your trading account from losses. The less money you lose in your first few years, the longer you can stay in the game. And that means more time to work at finding consistency.
Without proper trading risk management, your next trade could be your last! But too many day traders don’t understand just how crucial it is. Without it, you can lose all your hard-earned money in a single trade.
The fact is that all successful traders use smart risk management that fits their strategies.
If you take care of your downside, your upside can take care of itself.
When losses add up, it can affect you psychologically and mess with your head. That can further your losses if you’re not careful. Frustration can cause you to break discipline.
Your mindset can sway your performance more than your strategies and rules. That’s why it’s smart to take a break after losses.
Focus on minimizing your losses instead of maximizing your profits. Consistently small and manageable losses can help you have a better sense of control. You tend to be more disciplined when you don’t have big losses. And when you’re on a winning streak, remember to stay humble and disciplined. Greed can lead to over-trade the same way fear can.
Taking losses is uncomfortable, so we tend to hold them. This can lead to losses outweighing wins.
This is where trading risk management is key.
With these 2 important rules you have to learn to cut losses quickly and let winners run.
- Set Your Stop Loss First
Any trade can go against you, no matter how ideal. So expect the unexpected.
Cut losses quickly. If you want to be in this for long, you must do it. Set a stop loss and stick to it!
- Take a Proper Position Size
New traders are usually too aggressive. They haven’t experienced the dangers of the markets.
When you start off, you may want to move on to risk-based position sizing. This means you risk the same percentage each time. When you lose, you’ll lose the same percentage of your account.
When you start day trading, stick to a small risk, like 1% or less of your account. That can potentially help you stay in the markets longer.
The goal is to protect your downside. Doing so can have good financial and psychological effects. Remember those small wins can add up as long as your managing your losses well.