I'd like to talk a little bit about risk management when trading and to make sure that you always remain disciplined in your approach. There are a few different things to consider for managing risk, because if you don't have a strategy for minimizing risk, you will definitely find yourself losing money.
First, I'm talk about the times when you are trading and you feel that you are always right and your ego gets in the way. You feel that you can't be wrong and on this next trade you are going to "make a killing" so you load up more than you should on the position. Doesn't it always seem like that is the trade that goes against you? As you look at your P&L (profit/loss) and the losses grow faster than you're used to because of your larger position, you then decide to make an emotional and irrational decision, which is always almost the wrong decision to make. This can also be the trade the blows up your portfolio and you take a much bigger loss than you anticipated.
Another common mistake people make is not getting out of a trade when the market proves you wrong. Before even putting on the trade, you should already have a predetermined exit point, either a move below a moving average, previous pivot point, or trendline, whatever you determine to be your stop loss. The exit strategy can vary from individual to individual so find something that works for you depending on your risk tolerance. Have you put on a trade to find that it goes against you. How do you respond? Do you HOPE that it will come back and you might be able to breakeven on the trade? Well let me tell you, HOPE doesn't belong in the trading, it belongs in the bedroom and in church. Once the market has proven you wrong and has closed below your stop, get out!! That is the only way you will minimize your losses over the long term and to make sure that you're not hanging onto a big loser in your portfolio.
Position sizing is extremely important based on your entry and planned stop loss price. Having the right position can help to reduce your risk in cases where a trade really goes against you. For example, often times a stock may gap overnight on bad news and you find yourself in a very unprofitable position the next day. Having a planned $ risk on the trade will limit the overall damage on your portfolio and you will live another day to trade. The key should be to not lose money and to preservere your precious trading capital. For example, if you risk 1% of your portfolio on every trade, you will ensure that you will be around a lot longer compared to the person who risks 25% of their portfolio on the trade. Yes, if you risk more and your right, you could profit more, BUT if you are wrong, you will have to make back twice the amount to get back to where you were. To be safe, I would not risk more than 10% of your portfolio on any one trade.
Over the years that I've been trading, I've learnt that having a good risk management strategy is key to being successful and making money. Trading is a game of probability and you have to make sure to cut your losers fast and let your winners run. Never take on more risk than your comfortable and never get overconfident. It is these times when you become greedy that the market will move against you and crush you. Stay disciplined in your approach and create a solid risk management strategy!!
First, I'm talk about the times when you are trading and you feel that you are always right and your ego gets in the way. You feel that you can't be wrong and on this next trade you are going to "make a killing" so you load up more than you should on the position. Doesn't it always seem like that is the trade that goes against you? As you look at your P&L (profit/loss) and the losses grow faster than you're used to because of your larger position, you then decide to make an emotional and irrational decision, which is always almost the wrong decision to make. This can also be the trade the blows up your portfolio and you take a much bigger loss than you anticipated.
Another common mistake people make is not getting out of a trade when the market proves you wrong. Before even putting on the trade, you should already have a predetermined exit point, either a move below a moving average, previous pivot point, or trendline, whatever you determine to be your stop loss. The exit strategy can vary from individual to individual so find something that works for you depending on your risk tolerance. Have you put on a trade to find that it goes against you. How do you respond? Do you HOPE that it will come back and you might be able to breakeven on the trade? Well let me tell you, HOPE doesn't belong in the trading, it belongs in the bedroom and in church. Once the market has proven you wrong and has closed below your stop, get out!! That is the only way you will minimize your losses over the long term and to make sure that you're not hanging onto a big loser in your portfolio.
Position sizing is extremely important based on your entry and planned stop loss price. Having the right position can help to reduce your risk in cases where a trade really goes against you. For example, often times a stock may gap overnight on bad news and you find yourself in a very unprofitable position the next day. Having a planned $ risk on the trade will limit the overall damage on your portfolio and you will live another day to trade. The key should be to not lose money and to preservere your precious trading capital. For example, if you risk 1% of your portfolio on every trade, you will ensure that you will be around a lot longer compared to the person who risks 25% of their portfolio on the trade. Yes, if you risk more and your right, you could profit more, BUT if you are wrong, you will have to make back twice the amount to get back to where you were. To be safe, I would not risk more than 10% of your portfolio on any one trade.
Over the years that I've been trading, I've learnt that having a good risk management strategy is key to being successful and making money. Trading is a game of probability and you have to make sure to cut your losers fast and let your winners run. Never take on more risk than your comfortable and never get overconfident. It is these times when you become greedy that the market will move against you and crush you. Stay disciplined in your approach and create a solid risk management strategy!!
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