Risk Management is the Most important tool in trading and investing. A trader’s ability to limit his losses is just as important (Sometime even more important) as his success in managing winning positions.
If a trader losses a small amount on every trade, then he will stay in the game a lot longer. Taking huge losses is one of the main reasons why so many traders don’t survive in this business.
90% of the traders face this discipline problem and they start to build their loss potions until it becomes Unmanageable and then forcefully they have to take huge loss or automatic closes out of positions due to lack of margin.
Limiting losses in day trading is very crucial. According to our experience in this market we don’t think any trader should risk more than 2%to 5% of his trading capital on any given trade.
Let me explain you this in simple example- If a trader trade with proper discipline and trade to a 1% to 2% maximum loss guideline, his chances of staying in the game will be highly increased because it will take many consecutive losses to wipe him out of the business and he will have more money-making opportunities available to him in this great rewarding business.
If a trader will be managing a £10,000 account, he should not lose more than £100 to £ 200 (max 2%) on every position taken. Using the same risk management discipline if trader is dealing with a trading account that’s £100,000, the maximum loss he can take up £2,000 per trade. Based on the risk management discipline the chances of getting successful in this business will highly increased. This will also help you to take the right position with right stop loss.
In short, Risk Management is viewed as
Recognizing the existence
Identifying the roots of risk
Strategies to manage over risk
Key control standards and measure to manage risk
I can understand it’s easy to write and read these discipline methods but when a trader sits in this desk then controlling these emotions is very hard, I completely understand this because we have faced this challenge but if you want to become successful then without proper risk management it’s impossible. If the pain is to great, it may mean you have too much personal exposure. If the pain is bearable, you’re likely correctly positioned. This is the psychological part of trading. It doesn’t maximize returns but it allows you to trade your strategies and maintained a balanced mind frame.
No one have lost their portfolio for wrong technical or fundamental analysis, the most of the portfolio have been lost because of POOR risk management.