Managing risk in our trading, is something we strive for, so that we can….for lack of better words….take some of the risk out of trading. Day trading involves risk just like the disclaimers say, but there is a way to minimize the risk to a “maximum level” in my opinion. Most traders know that good risk management involves keeping your risk percentages within certain parameters (no more than 2%) and using the correct position sizzling in accordance with your risk tolerances. While this is all well and good, I feel that there a few pieces missing from the risk management puzzle that really need to be filled in order to have a complete risk management system/model.
Managing Risk – 2 Types of Traders
In my humble opinion, when it comes to risk management, there are two types of traders , there are those that know how to manage risk and those that frankly trade in a “willy-nilly” fashion all over the board. Your trading methodology (your edge) added to a strong foundation in money management will equal manageable, controlled risk. No day trading edge combined with no regard for risk management will equal nothing less than a complete derailment of your trading account.
So the real question a trader needs to ask themselves is if they are really in control of their risk, as well as do they believe in their methodology. A professional trader not only knows when and what to trade, but they are true masters (and believers) of the method that they trade; they fully understand the concept that not every trade is a winner, but believe wholeheartedly in a time tested system. Part of anyone’s day trading edge is utilizing a methodology that not only fits their personality but also fits their overall risk tolerances as well. Let’s face it folks, trading a method we don’t believe in, nor can we afford (the risk) will NEVER work for anyone! Finally, a trader who is in control of themselves knows when to quit, yes, when to walk away, but more important they know how to respect their stops and to NEVER add to a losing position.
Uncontrolled Trader vs. Professional Trader
The uncontrolled trader is going to do the exact opposite of what the professional trader does. Most uncontrolled, reckless traders have a fair understanding of their method but they have yet to truly adhere to the rules they have set up or they don’t believe in what they have created; if you don’t believe in what you’re doing with ANYTHING in life you will more than likely not succeed. This type of trader often fails to honor their stop or even worse fails to use a stop loss at all. Simple math here guys: Failure to use a stop loss order for any trade = Trading failure….end of story. The biggest thing that the uncontrolled trader lacks more than anything is a plan, the lack of adhering to their stop loss (if any) is a dead give-a-way. A trading plan can be as simple as taking a trade according to a certain trade setup, setting a realistic target, and of course, having a logical stop.
We’ll never be able to control price or even the outcome of a trade, but trading using your edge gives you a huge advantage and greater probabilities of what the “all over the place”, “willy-nilly”, and even the good ol’ “hasn’t got a clue” traders that are out there. Trading with an “EDGE” means you know what you are trading, when to trade, are ALWAYS aware of your risk, and you know when to stop.
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