Risk Management

Many people start trading stocks and never learn about stock trading risk management. The one’s that do learn, usually learn after they have been trading for a while, not before they start trading. Here is a timeline for a typical trader:

  • They start off and have a few winning trades in a row.
  • They read about other people making money trading and think “Hey, I have just had a couple of winning trades in a row, I CAN do this.”
  • Now after a few of these winning trades, they become confident that they can continue having the same success over and over again.
  • Next, they become Over Confident and they now think that nothing can stop them, and that trading is easy.
  • Now reality sets in. The same traders now experience one or two losing trades that wipe out their trading account or come darn close to doing so.
  • The people who have money left in their account, now stop and take a look to see what went wrong. They start to learn about Stock Trading Risk Management.

If this sounds like you, you’re not alone. If you haven’t been through these steps, great, now is as good a time as any to skip over the hard earned lessons above and learn about risk management now, rather than later. Keep in mind that every trader will have losses and the people who get wiped out with large losses are the ones who do not manage risk well, if at all. In order to be around to take advantage of the next trading opportunity, you must learn to mange risk on each and every trade. Here are some of the things you will be learning about when exploring stock trading risk management:

  • Determining your risk tolerance
  • Risk to Reward ratio
  • Determining Position Size for trades
  • Different order types to help minimize losses and capture profits
  • Diversification
  • Learning to identify possible entry and exit price points
  • When to cut your losses

Once you learn about these and other risk management topics, you will be able to evaluate each trade before and after entering into a position. You will also be able to make any necessary adjustments as the position moves either against you or “in your favor”. You may have noticed I mentioned “in your favor” also. Yes, that’s right. I have seen and read about many traders who at one time or another had a sizeable profit in a position only to keep holding it and watch as it turned into a losing trade, and finally selling when they can’t stomach the continued, increasing losses. These people need to learn about risk management also. Stock Trading risk management is not just about limiting or controlling losses, but understanding how to capture and try to maximize profits as well. All of these things can be learned and adjusted based on each person’s particular trading plan or system that they use. Whether you are an intraday scalper or a long term investor, risk management should be a part of every traders plan to achieve long term success. While there will be other area’s to explore in addition to these, having a place to start will help you get started and hopefully avoid some of the costly mistakes many traders make over and over again.