There’s a famous saying in sports that “defense wins championships”…
While I don’t know how true this statement is in sports, it definitely is in the stock market!
Trading involves two major components:
Potential risk and potential reward.
While the reward part of the equation is more exciting to talk about, it is arguably the less important of the two when it comes to one’s long-term success.
With this in mind, let’s delve into a few important pieces of good risk management…
Have a plan
When it comes to trading, it’s very important to have a concrete plan that one is following.
You can’t expect to go out on the battlefield without any strategy and expect to come out victorious.
Every possible scenario needs to be accounted for…..including the good and bad!
I recommend writing them down to keep yourself accountable.
A plan is only as useful as one’s commitment to follow it…
Have a position size limit
No matter how good your “plan” is, there is an inherent level of risk in every trade.
We always need to take that risk into account when taking a position.
We need to trade in a way where the worst-case scenario will not result in one’s account being blown up…
This comes down to following a steadfast rule on the maximum size of a given position relative to the overall account size.
In other words, what percentage of your account you are willing to put on the line for a single trade…
This will differ from person to person and their overall risk tolerance.
Setting Stop-Loss and Take-Profit Points
This may seem pointless given that we are already looking to follow a pre-defined plan.
As we mentioned earlier though, there is a difference between having a plan and executing on it…
Having set stop-loss and take-profit points helps ensure that the plan is followed as closely as possible!
While these are by no means a magic bullet, they do add a little bit of peace of mind for a trader.
That’s all for now.
Until Next Time,