Maybe the most critical trading fundamental to have a grasp on is Risk Management. Risk management can come in many forms. For beginner traders, we find it best to keep it simple. We have outlined below, 3 tips to managing risk as a trader.
Pre Defined Trade Goals/Plan
Before entering any trade, have a pre-defined goal for what success or failure looks like on your trade. This simply means, know where you are taking your money off the table both for a win and a loss. This can be as easy as telling yourself, I’m going to sell my options position when I get to a 30% winner. I will also sell my position if it goes 30% against me. This helps define a risk reward for your trades. This means on average, if you followed these rules and were 50% right on your trades, you would break even (other variables come into play such as position sizes, but in theory this could hold true with other variables remaining constant). In this scenario, to be profitable over time, you would need to have a greater than 50% win rate on your trades. This at its most basic level can help you begin to keep track of your trading stats and point you in the right direction of achieving profitability over time.
To help reach these goals, it’s important to take advantage of the orders at your disposal via your trading brokers. Use limit orders, use stop orders. These take the guess work out of it. Set your goals, stick to them, leave emotions out of it. In the long run, striving for consistency to your strategy has the best potential to pay off.
Control Emotions – Be Diversified
One other item we cannot stress enough is, NEVER put your whole trading account’s equity into a single trade. This is the single biggest mistake any trader can make. You must be able to adequately manage your risk as a trader. We know with a small account, it can be hard to not go “all in” on a single trade, but this puts you at the most risk for blowing your account up. Not to mention, the other opportunities you may miss by tying all your capital into one position.
Instituting some basic form of risk management principles like the ones above, you will be able to see a more structured and defined approach to your trading.
If you have any thoughts or questions about Risk Management and Trading, feel free to use the contact form below. We will get back to you as soon as possible!