Managing Risk as a trader is the most important consideration and if you answer NO to any of the following questions, then STOP TRADING until you can answer YES to all of them:
- Do you have a written trading plan that deals with risk management?
- Have you calculated the risk that you are comfortable with in every trade?
- Will you not place a trade, even though you have a healthy balance in your trading account, when you know that your risk exposure goes beyond the risk outlined in your trading plan?
- Have you identified what your maximum position size will be?
- Do you have a stop in place every time you trade?
- Are you aware that risk management is not just about where you place your stop?
- Will you be able to stick to your risk management rules under ALL trading conditions?
There are many ways to manage your risk but until you have a risk management process written into your trading plan and you stick to these risk management rules on EVERY occasion, then you have more work to do until you are on your way to being a successful trader.
Successful risk management means the difference between failure and success and many have said that money management through protecting your trading capital is as high as 90% of what is deemed ‘best trading practice’ and many people give risk management a minority placement in the hierarchy of successful trading requirements.
Some more questions that come within the parameters of your risk management requirements could be:
- How much money do you place on each trade?
- What is risk to reward ratio will work with your trading system?
- How can you ensure your rules around entries and exits will support your risk management
- What percentage of your trading capital will you risk at any one time?
- How will you handle taking profit drawdowns from your trading account?
- Have you tested your system with your risk management strategy?
There are myriad ways that you can trade successfully and depending on your strategy or system, the risk management criteria can be as simple or as complex as your strategy or system. As you fine tune your system, you will also always need to determine that your risk management is still appropriate.