Here are 6 trading articles on how to improve risk management. Risk management takes many forms, including position size, stop losses, loss caps, exposure to gaps, controlling mental state, and following a strategy based on tested method. Learn about all these risk management tactics below.
Many traders utilize a few of these risk management tactics, but if not using all of them (when applicable) a trader may be taking on more risk than they think.
One of the best ways to manage risk is with a stop loss order. See, Where to Place a Stop Loss When Trading.
Once the stop loss is known, then it is possible to calculate a proper position size for the trade. The position size allows us to balance out the risk of any trade, because no matter where the stop loss is we can control how much of our capital we could potentially lose.
For day traders, utilize a stop loss on each trade (know where you will get out of a loser), but also know when to quit for the day. A Daily Stop Loss, protects day traders from losing more in one day than they can reasonably recoup on a winning day. Don’t let one day ruin your week, month, or career! The daily stop loss article explains how to manage your daily risk.
When we trade, even when using a stop loss, we may face losses much larger than we expect if the market makes an extreme move. Our stop losses protect us against normal stock, forex, and futures market movements. Yet, in the back of our minds, we always need to consider what our risk is if something crazy happens. We need to Reduce the Risk of Catastrophic Trading Losses.
Traders also need to remain mentally sharp. Having a bunch of risk management protocols means nothing if we mentally break down and don’t follow them. Risk Spikes are mental mistakes that ruin traders.
Once we are familiar with these risk management tactics, we need to formalize how we, personally, will implement the tactics while we trade. This is done by creating or updating our Trading Plan. It is the document that outlines how we will manage all the aspects of our trading business.
Finally, here is a bonus article about a trader who battled with his risk management throughout his career. He had tremendous ups and downs, making fortunes and then losing them. Trading Tips from Legendary Millionaire Trader Jesse Livermore looks at things he knew he should do, but sometimes didn’t.
Hope those help you out!
If you are interested in learning how to trade the stock market, check out my Stock Market Swing Trading Course. I guide you through 17 videos and more than 12 hours of instruction on how to swing trade stocks effectively and efficiently whether prices are rising or falling. Download and learn at your own pace.
Cory Mitchell, CMT